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June PPI data comes in higher than expected

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Yahoo Finance Live anchors discuss June producer price index (PPI) data.

Video Transcript

BRIAN SOZZI: As you can imagine, Julie, there is a lot of reasons why the markets are under pressure. So here are three things you need to know right now. We just got producer price numbers for the month of June coming in at 11.3% year over year. Let's get to our very own Brian Cheung here at the desk. Brian, new day, same old read on inflation. Now I'm looking at a note from Citi Bank looking for 100 basis point rate increase at the Fed's meeting in a couple of weeks. But take us through this PPI.

BRIAN CHEUNG: Yeah, well, for those that are wondering, I thought we literally just got an inflation print yesterday. That's because we did. That was the Consumer Price Index that we got yesterday in the morning. This morning is the Producer Price Index. A little bit different. It doesn't account, for example, rent because it's only looking at domestically produced things. It also includes costs that might not be paid for directly by the consumer. So think insurance, for example, for medical services.

But either way, this does include the gasoline prices, which is a big reason why that headline number is so shocking for this report on a headline basis. Again, 1.1% was the increase between month and June, again, because of that 18.5% increase in gasoline. If you take a look at other components that also increased, electric power, residential natural gas, motor vehicles, and equipment. Also processed young chickens, although that was a large offset for chicken eggs actually declining by 30%.

BRIAN SOZZI: Good. Good.

BRIAN CHEUNG: So we did see that.

BRIAN SOZZI: All right, all right. Long overdue.

BRIAN CHEUNG: At least we saw that for you, Brian.

BRIAN SOZZI: I'm a champion of these deflationary egg prices. This is great news. Great news.

JULIE HYMAN: As long as they pass it through. And speaking of passing it through, one of the interesting takeaways for me from producer prices is, you have had, particularly on the political end of the spectrum, accusations of gouging. Companies are taking advantage of consumers. This number implies that's not the case. In other words, a producer-- I mean, we're talking, like, zooming way out. But if producer prices are rising 11.1%, and consumer prices are rising more like 9%, then that means they're not even passing along all of these increases.

BRIAN CHEUNG: Right, and again, some of this is kind of an accounting question, right? Because, again, when you talk about the PPI, what makes it different than the CPI, which we got yesterday, it's just a mess of alphabet soup. But essentially, what it is, is that it's how much is the producer paying for those goods, right, as implied by the name, Producer Price Index, whereas the Consumer Price Index is just what's the price tag that I am personally paying when I go to the store, because there's a lot of things that go behind the production of something that aren't ultimately passed on to the consumer.

So when you talk about concentration and market power, certainly, there is a narrative that's floating out there about how much power a lot of the large companies like an Amazon, for example, have to pass on all of their costs, or none of the costs, to the consumer.

The PPI and the CPI in this environment, just because everything is so volatile, it's a little bit difficult to create a clear thesis on whether or not that consolidation has led to more or less pricing power, I'm sure there will be very interesting studies later on down the line. But at least, for right now, the whole story remains intact that prices are going up across the board for both producers, but also for the end consumer as well.

BRIAN SOZZI: Brian, it's been fascinating over the past 24 hours, actually, since we got that CPI report, how the market has shifted now to a potential 100 basis point increase in rates at the Fed's next meeting. I can't say this enough. That is not normal. I mean, you do not normally see increases like that from the Fed, but really underscores that inflation is staying high, and it's just not going anywhere.

BRIAN CHEUNG: Yeah, you mentioned Citi earlier this morning. I mean, it'll be interesting to see if the flurry of economic information that we've gotten this morning supports further the case for 100 basis point-- it's really a 1% increase from the Fed at the end of their next meeting, which is at the end of this month.

But for what it's worth, we've been hearing a lot of debate about whether or not it would be good for the Fed to continue to ratchet up the pace of its tightening when you consider that the progression of its rate hikes so far was 0.25%, then 0.5%, then 0.75%, then possibly 1%. Does that just continue the Federal Reserve's path right now, which appears to be maybe getting out of control, with inflation really running away?

But I want to read to you what Evercore ISI is saying on the other hand of things, which is that they feel that this is the Fed perhaps mixing up the messaging here. And they worry, quote, "What is clear to us is that simply chasing headline inflation higher with ever larger units of hiking in a backward-looking outcome-based rule for stopping raising rates is likely to end badly."

BRIAN SOZZI: It doesn't sound bullish to me.

BRIAN CHEUNG: Either way, yeah, it's kind of a "damned if you do, damned if you didn't."

JULIE HYMAN: Well, we did hear from the Fed Bank of Cleveland President Loretta Mester in an interview yesterday. She did not seem to want to commit to 1% at all. She said we still have the University of Michigan confidence on Friday. We still have retail sales on Friday. She did call the CPI report uniformly bad, which I thought was interesting. And then Raphael Bostic of Atlanta said, everything is in play when he was asked by reporters, so.

BRIAN CHEUNG: And just to kind of baseline here, that's not new commentary. Even in the June FOMC, the Fed chairman was pressed about whether or not, well, is the next step-- or would a 100 basis point hike be on the table at some point down the line? He said, quote, "I wouldn't want to put a number on what that might be." That was on June 15 before the economic data that we got this week.

So the Fed had always maintained that flexibility to do whatever they wanted. But of course, the messaging was that it was going to be either 50 or 75 at the end of this month. The reports that we got yesterday in the morning and then also this morning might blow the lid off that.