Implications: The zig-zag pattern in producer prices continues as we start the second half of 2014, but the underlying trend points to some acceleration in inflation. Following a dip in May and a jump in June, producer prices rose a modest 0.1% in July. The gain was all from services, as goods prices were flat in July. The rise in service prices was led by transportation and warehousing, up 0.5% in July. Prices for goods were flat in July as a 0.6% drop in energy prices offset a 0.4% increase in food and a 0.2% gain in goods excluding food and energy. Through the first seven months of 2014, producer prices are up at a 2.5% annual rate, well above the 1.4% rate over the same period in 2013. The acceleration is more prevalent in prices for goods, which account for nearly 35% of the total index. Goods prices are up 2.0% in the past twelve months but have climbed at a 2.9% annual rate so far in 2014. By contrast, services are up 1.5% from a year ago and have climbed at a 2.2% rate in the past seven months. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for processed goods are up at a 1.8% annual rate in the past three months, nearly identical to the 1.6% gain over the past year. Prices for unprocessed goods saw a sharp 2.7% decline in July and are down at a 13.7% annual rate in the past three months. But intermediate demand prices are highly volatile and we expect prices to move higher over the coming months. Taken as a whole, the trend in producer price inflation is hovering around 2%. In other recent news, trade prices showed little inflation in July. Import prices declined 0.2% and were unchanged excluding oil; export prices were unchanged overall, but up 0.3% excluding agriculture. In the past year, import prices are up 0.8% while export prices are up 0.4%. We expect more inflation in the year ahead given loose monetary policy.
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