‘Scorching’ Is The Adjective Du Jour

I suppose it would’ve been something of a “letdown” if PPI had posted a downside miss Wednesday, what with “scorching” having established itself as the adjective of the week.

Producer prices for final demand rose 1% in June, considerably hotter than the 0.6% the market expected. The range, from nearly five-dozen economists, was 0.2% to 1.1%.

The unadjusted, 12-month rise was a freakish 7.3%. That was another new record in data going back more than a decade (figure below).

The YoY gain for core was 5.6%. Again, that was an all-time high and well more than the expected 5.1% gain.

Some 60% of the June increase was attributable to a 0.8% rise in prices for final demand services. It was the sixth straight monthly advance (figure below).

Around a fifth of the jump in the final demand services index was down to margins for automobiles and automobile parts retailing. Indexes for hardware, building materials, and supplies retailing, along with guestroom rentals, professional and commercial equipment wholesaling and transportation all moved up.

Obviously, this is further evidence to support the contention that firms will be inclined to pass on rising costs to consumers. In an environment of robust demand, that option could be particularly tempting, especially if there’s any truth to the idea that Americans are more price-insensitive than usual thanks to an overwhelming desire to “revenge spend” and otherwise blow through what analysts habitually refer to as an “excess” savings buffer.

I’m dubious of the “excess savings” narrative. My rule of thumb is that a cash cushion doesn’t count as “excess” until it rises beyond $100,000. That’s always been my guesstimate for how much readily accessible cash households need to inoculate themselves from all but the most disastrous of eventualities. You can’t plan for everything, but $100,000 that can be accessed immediately, with no caveats and no contingencies, is a near-term silver bullet for most families. Anything beyond that is truly “excess savings.” By contrast, what Americans tend to mean by “excess savings” is anything beyond a few months of mortgage payments and expenses. That’s not “excess savings.” That’s just the bare minimum cash buffer you need to sleep well at night.

Anyway, the point is simply that the boilerplate copy (e.g., from Bloomberg: “Prices paid to US producers rose in June by more than expected, indicating pressure is mounting on companies to pass along higher costs to consumers”) inadvertently belies the reality on Main Street. A spending spree funded by, say, $5,000 “extra” in a checking account won’t last long. So, passing along rising costs to consumers will be easier said than done looking out three to six months. Hopefully, by then, the “bottlenecks” will have cleared.

For markets, nobody cared on Wednesday. If you were going to trade inflation, you did it Tuesday, when June CPI came in hot — err, “scorching.”