Implications: Led by falling energy prices, producer prices pulled back 0.1% in April. This follows a five-month period when prices climbed at a 9% annual rate and, even with April factored-in, the six-month gain is still at a 7.3% rate. In other words, we don't see this report as a reason for the Federal Reserve to stay dovish on inflation. What's really interesting is that "core" inflation, which excludes food and energy, increased 0.2% in April and shows much more acceleration deeper in the production process. Core intermediate prices were up 1.1% in April and are up at a 8.3% annual rate in the past six months; core crude prices increased 4% in April and are up at a 47.9% annual rate in the past six months. In fact, core crude prices are up 49.7% in the past year, the largest increase since the early 1970s. "Core" inflation may be a more important measure to follow over the next few months as speculation over Europe's debt problems have helped drive down commodity prices in dollar terms. The bottom line is that the underlying trend in producer price inflation remains too high and will accelerate in the years ahead due to too loose a monetary policy from the Fed. The longer the Fed waits to respond the more serious the inflation problem will become.
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