My daughter Jennifer is now married with kids of her own. But when she was a pre-teen and we lived in Massachusetts, she regularly dragged me onto a vintage roller coaster at an amusement park in nearby New Hampshire.

Built in 1930, this “family friendly” ride was a rickety wooden contraption called The Yankee Cannonball. Jen loved it. I dreaded it.

I thought about the Yankee Cannonball today, in the wake of the latest inflation report. It seems the economy’s progress against inflation is just as precarious.

Inflation data has become the economic roller coaster we didn’t sign up for: one month showing promising declines, the next revealing a spike that sends us reeling, only to calm down again just as we’re bracing for the worst.

On Thursday, we got a surprisingly good consumer price index (CPI) report. Investors cheered. Then on Friday, the producer price index (PPI) arrived unexpectedly hot. Wall Street’s mood soured. You can bet that the besieged White House isn’t too happy, either.

Investors are wondering if we’ll ever find a steady rhythm in this inflation fight. Adding to the investment uncertainties are geopolitical tensions, a wild U.S. presidential race, and monetary policy that toggles between doves and hawks.

The U.S. Bureau of Labor Statistics (BLS) on Friday reported that the PPI unexpectedly climbed in June to its highest rate since March 2023. That’s a negative development for the U.S. economy and stock market, one day after the government announced that the CPI in June fell on a monthly basis for the first time in four years.

The PPI is a gauge of wholesale prices and as such it serves as a leading indicator for inflation. The BLS revealed that the PPI was 2.6% (non-seasonally adjusted) for the 12 months ended in June, rising from the 2.4% annual rate seen in May (see chart).

Source: U.S. Bureau of Labor Statistics

On a month-over-month basis, the PPI rose 0.2% (seasonally adjusted) after holding flat in May. Economists had expected that prices would increase 0.1% on a monthly basis and remain steady at 2.2% annually.

The Federal Reserve’s target for inflation is 2%, so while there has been progress in bringing inflation down from its peak of about 9% in 2022, the central bank has a way to go. Fed Chair Jerome Powell made this clear, in his remarks this week on Capitol Hill.

The unwelcome spike in wholesale prices underscores persistent inflationary pressures and leaves the Fed in a tight spot, despite Wall Street’s optimism fueled by better-than-expected earnings from major banks.

According to the July 12 reading of the CME Group’s FedWatch tool, Wall Street is putting the odds at 95.3% that the Federal Open Market Committee (FOMC) will stand pat on rates at its next meeting this month.

Why the PPI matters so much…

The PPI is predictive of inflation because it measures the average change over time in the selling prices received by domestic producers for their output.

PPI captures price changes earlier in the production process compared to the CPI. Since it tracks prices from the perspective of producers, it reflects cost changes in raw materials and intermediate goods that will eventually affect consumer prices.

When producers face higher costs, they often pass these costs onto consumers in the form of higher retail prices. This pass-through from producer prices to consumer prices means the PPI signals forthcoming changes in the CPI.

PPI includes a wide range of goods and services across various industries, offering a broad perspective on price changes. It covers goods at different stages of production, including raw materials, intermediate goods, and finished products.

PPI provides an early warning system for inflationary pressures that will eventually be felt by consumers. We got that warning on Friday.

Banking’s “big boys” deliver good news…

In positive news, a bevy of big banks released second-quarter 2024 operating results before the opening bell Friday and the numbers generally beat expectations. JP Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C) all posted Q2 earnings that exceeded analysts’ estimates.

The major U.S.-based financial institutions are considered bellwethers for the overall economy; their solid Q2 numbers help offset the unpleasant surprise over the PPI.

The major U.S. equity averages closed higher Friday on earnings optimism, as follows:

• DJIA: +0.62%
• S&P 500: +0.55%
• NASDAQ: +0.63%
• Russell 2000: +1.09%

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