The long-dormant fires of inflation were fanned in August, and much more so than had been expected. Specifically, the Department of Labor reported that the Producer Price Index jumped by 1.7% last month, nearly six times the increase tallied in July and 70% above the 1.0% rise generally forecast.

This was the first month this year that we have seen a worrisome increase in pricing at the wholesale level. To wit, from January to July, the monthly range for the PPI has been a decline of 0.9%, experienced in May, to a gain of 0.4%, seen in February. In three of the first seven months of 2012, the PPI had actually fallen. Until now, therefore, there had been no inflation concern. This is not to suggest that we have a problem of long duration now. It is just that for one month, at least, inflation has heated up. Now, we shall see if the sudden pricing spike has legs.

As for the report, itself, the Producer Price Index, which measures how much manufacturers and wholesalers pay for finished goods, rose by the largest amount in any single month since June of 2009. The latest spike, meanwhile, was occasioned by a 6.4% surge in energy prices last month.

Wholesale energy prices rose in August for the first time since February, as gasoline costs spiked upward by an outsized 13.6% last month, a gain that comes as no surprise to those regularly filling up their tanks. On a year-to-year level, prices in August were up by 2.0% for the last 12 months. That is clearly not an inflation problem of note. Such a tame pricing report on a 12-month basis should give the Federal Reserve some leeway as it meets today and possibly opts to inject additional monetary stimulus into the system, via a new round of bond purchases, or quantitative easing.

Meanwhile, energy prices weren't all that rose sharply last month. So, too, did food costs. They gained 0.9%, as prices for eggs and dairy products jumped up. And, the widespread drought in this country could lead to further food pricing pressures in the months to come, while the inflamed tensions in the Middle East could well cause energy prices to increase further, as well.

The recent spike in oil prices this month may, moreover, lead to additional sharp PPI gains in September. We will get that report in the middle of October. Meantime, we are scheduled to get the companion Consumer Price Index report tomorrow morning, where a much more tame, but still elevated, 0.6% rise is the consensus forecast. The July CPI reading had been unchanged, by comparison.

All told, this was a worrisome report. However, if this latest jump in inflation is just a one or two month affair, and there is not at this time much widespread inflationary pressures beyond energy and food, the Fed will not be dissuaded from taking new monetary steps should it so desire. The next few months could be interesting on this count, and in a way that we have not seen in some time.    

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.