July wholesale data shows that inflation concerns are still fresh and should be at the top of the list of… … current economic concerns.

Tuesday’s (August 19) announcement showed wholesale prices climbed 1.2 per cent during July, which was well over the ½ per cent estimates that had been forecasted. The July increase also contributed to a twelve month run of 9.8 per cent for the last twelve months. This was the largest annual increase in wholesale prices since 1981.

Food and energy prices contributed significantly to the index increase, however, core prices which exclude those items were up .7 per cent. The expectation was for just a two per cent increase in core prices. These core prices are what are most concerning to the Fed as it watches signs of inflation the might prompt a necessary hike in interest rates.

In spite of the strong rise in July wholesale prices, many analysts believe the ceiling has been or will be soon reached for inflation. The dollar has strengthened mightily in recent weeks. The Euro sits just above $1.47, while the British Pound incredibly fetches just over $1.86, twenty pips off its high from several months ago. Such a dramatic increase in dollar value combined with the tremendous downward move in the last month in oil and gas prices is expected to help moderate upcoming inflation index levels.

Another round of negative retail news Tuesday also contributed to the economic concerns of the day. Target, which offers a good indication of how price conscious consumers are acting, said its second quarter profit dropped 7.6 per cent from its second quarter of 2007. The company said the lower profits and its warning for its third quarter are related to customers focusing more on economic buys and essentials than its more value-oriented, good quality at a good price portfolio. Wal-mart, the budget-conscious customer’s stomping ground has thrived in recent months relative to its competitors, as consumers have tightened their purse strings.

The news was even worse for leading home improvement retailer Home Depot, which reported a second quarter loss of 24 per cent compared with the same quarter last year. The results were actually slightly better than some analysts had expected, likely due to nice weather for do-it-yourself home shoppers.

Retail performance was even worse for the more upscale retailers, including Saks Fifth Avenue, which reported Tuesday. The company had a wider-than-expected loss for its second quarter, which it blames mostly on same-store sales performance. Poor profit production from existing stores is a strong indication that company performance overall has been weak.

Saks lost $31.7 million during its second quarter, just over seven million dollars more than it lost in the second quarter of 2007. The bad news for share holders and other stakeholders in the company is that it has already warned of flat or declining same-store sales for the second part of 2008.

Many leading economists are quick to suggest that the tide has turned on the dollar, pricing and inflation, and that the current data is part of the final leg of the high inflation cycle. It could take a few months for the data to match the change in direction, if it has indeed happened. Most experts do seem to agree that the turnaround in inflation and wholesale prices could develop slowly.

Market Recap

Equities have fallen hard to start off the trading week. Monday, the Dow dropped 180 points. It followed with another loss of 130 on Tuesday. The NASDAQ also dropped 32 points Tuesday, with the S&P off 11. Inflation concerns were front and center Tuesday as the dollar feel against the Euro and other major currencies. The weak dollar pushed oil above $114. Wholesale prices climbed the fastest since 1981. Second quarter retail struggles caused more financial concerns.

Neil Kokemuller
Tuesday, August 19, 2008
11:32 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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