Inflation in check
The producer price index fell 0.9 percent in July after declining 0.4 percent in June. As a result, the year-over-year rise in inflation has dropped to 1.5 percent from 2.5 percent just one month ago! Energy prices plunged 5.8 percent in July on top of a 2.5 percent decline in June and that certainly played a major role in pushing down the PPI over the past two months. In addition, food prices fell 0.6 percent in July, also contributing to the downward pressure. On a year-over-year basis, energy prices are down 0.3 percent, but food prices are 2.7 percent higher than a year ago.

Excluding the volatile food and energy components, the PPI rose 0.2 percent in July, in line with the pace of recent months. The core PPI has posted a year-over-year gain of 1.6 percent for four straight months.

Market analysts and policymakers also follow the crude and intermediate goods price indexes to see how inflation is behaving at earlier stages of processing. Excluding food and energy prices, intermediate goods prices fell 0.4 percent and crude materials prices declined 0.9 percent. Intermediate goods prices are down 0.5 percent from year ago levels; crude materials prices are a whopping 10.3 percent below a year ago. Clearly, the inflation trends are favorable going forward into the next few months.

Other inflation news reported this week was also favorable. Import prices fell 1.6 percent in July with both petroleum import prices (-6.1 percent) and non-petroleum import prices (-1.0 percent) declining. Lower import prices not only allow consumers to buy lower priced goods, but also create competitive pressures for domestically produced goods. Export prices decreased 0.4 percent in July. Both import and export prices are well below levels experienced a year ago.

Revised productivity data mostly reassuring
Nonfarm business productivity rose at a 2.5 percent rate in the second quarter after inching up at a 0.1 percent rate in the first quarter. Productivity gains were somewhat better than expected in light of the meager 0.7 percent rise in GDP for the April to June period. Unit labor costs rose at a 2.1 percent rate in the second quarter, less than the 5 percent pace recorded in the first three months of the year.

Productivity and cost figures were revised back to 1998 and many analysts had been worried that the productivity figures would be revised down enough to wipe away the "productivity miracle" of the 1990s. In fact, nonfarm productivity was only revised down slightly for 1998 and 1999, but more significantly in 2000. On a year-over-year basis, the chart above still shows relatively healthy gains in productivity in the second half of the 1990s culminating in a peak in early 2000. Basically, the productivity revisions weren't quite as supportive of a "productivity miracle" but neither did they wipe away the gains that made us marvel during the boom.

Perhaps more interesting, though, are the revisions in unit labor costs. Original data showed declines in unit labor costs during a few quarters. In fact, the declines were wiped away and the acceleration in costs began sooner than initially estimated. This more likely explains some of the profit margin squeeze that companies experienced in the past year. On a year-over-year basis, unit labor costs rose between 4.5 and 5.0 percent for three straight quarters - a pace last seen in 1991.

Are consumers finally slowing down?
Consumer installment credit declined $1.5 billion in June; its first monthly decline since November 1997. The June drop was surprising given that motor vehicle sales actually increased during the month. However, nonauto retail sales were sluggish. It appears that consumers are starting to pay down some debt, as economic conditions remain soggy. A moderation in the pace of consumer credit growth may keep consumer spending in a holding pattern for a few months, but this would strengthen consumer expenditures down the road when balance sheets become more solid.

It will be interesting to see if consumer credit continues to decline in the next couple of months as consumers begin receiving their tax rebate checks in the mail. A good chunk of surveys reveal that consumers are more likely to pay down debt than increase spending with the windfall. In the meantime, retailers are trying to capture some of the rebate money by allowing the checks to be cashed in their stores - with purchases, of course.