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One day after the U.S. Labor Department reported a small increase in the aggregate Producer Price Index for July and a larger-than-expected gain in the core PPI, which backs out the volatile food components, that same agency reported materially different results on the Consumer Price Index front. Specifically, Labor said today that July's overall CPI soared by 0.5%, well above the tamer forecast for the month, while the core CPI gained just 0.2%.
 
In all, the comparatively large CPI gain reflected a 0.4% rise in food prices last month and a 2.8% surge in energy costs. The jump in energy prices countered a large decline in that metric in June. Consumer prices had fallen by 0.2%, overall, that month.
 
Among the rising components last month, in addition to food and energy, were prices for used cars and apparel, with the latter surging by 1.2% in July. Medical care services, which gain with regularity, rose by 0.3% in July, the fourth month in succession that this sector had increased by that moderate amount.
 
Meanwhile, the 0.2% increase in the core CPI made it six months out of seven so far this year that all items save for food energy had increased by either 0.2% or 0.3%. The lone outlier was in March when the core CPI added just 0.1%.
 
Overall, the inflation gauges were mixed this past month. On the PPI side, we saw an overall gain of 0.2%, but a core increase of 0.4%. On balance, the inflation picture is somewhat troubling, with prices elevated from last year. In fact, the higher inflation rates, which are likely outside the Federal Reserve's comfort zone, could well limit the lead bank's maneuverability on the monetary side. Our sense is that an extension of the recently expired QE2 may be hard to propose unless we see a material deceleration in the rate of price increases in both the PPI and the CPI over the next few months. Unfortunately, given current trends, if we do see such a moderation in pricing pressures, it may be because of faltering economic growth. Either way, the near-term outlook is not very promising.

At the time that this article was written, the author held no shares in any of the companies mentioned.