This morning the Department of Labor released its July report on the Producer Price Indexes for Finished Goods, Intermediate Goods, and Crude Goods.

The finished goods PPI measures the selling price of goods when they are first ready for sale to the ultimate consumer. It is this index that is always reported on in the popular financial press.

Changes in the finished goods PPI provide an indication of the rate of inflation (price increases) at the time the goods go out the factory door. The Consumer Price Index (CPI) measures inflation later, after purchases by the public are rung up at the retail cash register. All other things being equal, the finished goods PPI should give an earlier warning of inflation than the CPI. The CPI report for July is scheduled for release next Tuesday.

Bond market participants watch both of these indexes, along with any other information that might give clues about inflation. Rising inflation breeds higher interest rates and lower bond prices. Stock investors closely monitor what's happening to bond yields because historically the stock market has performed well in an environment of falling interest rates.

Today's report showed that, from June to July, the finished goods PPI was unchanged. This followed a rise of 0.2 percent in June and a 0.1 decline in May. The finished goods core rate of inflation rose by 0.1 percent in July. The core rate is derived by excluding the contributions of the highly-variable energy and food price components from the PPI calculation. In the past 8 months the core PPI rose by 0.2 percent on two occasions, increased by 0.1 percent three times, was unchanged once, and declined twice by 0.1 percent -- a compounded annualized growth rate of just 1.05 percent.

If we examine the change in the finished goods PPI over a longer period, say a year, the month-to-month food and energy variations tend to average out. For the twelve-month period ending in July, the finished goods PPI rose by 2.6 percent -- down slightly from June's year-over-year reading of 2.7 percent.

From June to July the Intermediate goods PPI decreased by 0.3 percent and the crude goods PPI rose by 1.2 percent.

The core rate for the intermediate goods PPI declined by 0.3 percent in July -- the ninth decline in the last ten months. Altogether, this indicator has been declining for 11 months. Slifer and Carnes, in their book "By The Numbers" identify the intermediate core rate as an excellent leading indicator of the core rate of the finished goods PPI. Changes in direction of the intermediate core rate precede changes in direction of the finished goods core rate by about a year. So, the intermediate goods core PPI is predicting lower finished-goods price growth during the next year.

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Today's PPI data was greeted enthusiastically by the bond market. At the end of the day, the 30-year T-bond had risen by 24/32 and the yield had backed down from 6.79 to 6.69 percent.