The producer price index for August came in at a much higher-than-expected 1.7% increase for the month, following a 0.9% decline in July and a 1.8% increase in June. The consensus expectation was for a rise of just 0.8%.

However, it was almost all because of higher energy costs. Core (ex food and energy) inflation was just 0.2% (just a notch higher than the 0.1% expected), following a 0.1% decline in July and a 0.5% increase in June. Energy prices rose 8.0% following a 2.4% decline in July and a 6.6% increase in June.

On a year-over-year basis, producer prices were 4.3% lower, but in July they were 6.8% lower. Core producer prices are up 2.8% on a year-over-year basis. The year-over-year numbers are going to start looking much hotter in the future, as most of the really big declines were in the fall of last year, especially in the fourth quarter.

Looking further up the pipeline at the earlier stages of production, the monthly numbers are starting to have a distinctly warm feeling to them. Intermediate goods saw a 1.8% increase in August, following a 0.2% decline in July and a 1.9% rise in June. On a year-over-year basis, they are still ice cold, with a decline of 12.3% in August vs. a 15.1% decline in July. However, that is a reflection of massive declines in the fourth quarter of last year, when each month saw a decline of more than 4%, for a cumulated quarterly decline of 12.5%. As those numbers roll off, the year-over-year numbers are going to start looking much hotter.

Things are even more extreme at the crude stage. Crude goods are essentially commodities, and thus tend to have much larger price swings than do intermediate or finished goods. Crude goods prices have been seesawing, with a 3.8% monthly gain in August after a 4.5% decline in July and a 4.6% increase in June. On a year-over-year basis, prices on crude goods are still down 35.2%, but just last month they were down 44.8%. The collapse in crude goods prices last fall was absolutely spectacular. In October of last year, crude goods prices crashed by 16.1% and then in November the carnage continued with a 13.1% decline. As those roll off the year-over-year numbers, it could start to look on the hot side.

Looking with a finer-toothed comb at where finished goods prices are rising and falling the most on a year-over-year basis, we see that pharmaceuticals are once again rising in price far in excess of other prices, up 7.2%. Those numbers include both prescription and over-the-counter medications.

Firms like Johnson & Johnson (JNJ) and Bristol Myers (BMY) are going to have an easier time maintaining their margins than are most companies.

Prices for many other non-durable items have also been increasing. For example, the cost of detergents is up 6.0% year over year while sanitary paper products (toilet paper, paper towels) is up 3.7% year over year. That is good news for the likes of Proctor and Gamble (PG) and Colgate Palmolive (CL).

On the downside, the biggest declines by far come from the energy area. This will be very helpful to consumers this winter, as the cost of heating your home is going to be much lower than last year. The price of residential natural gas is down 27.5% from a year ago. If you heat your house with oil instead of gas, you are even luckier; the price of home heating oil is down 47.6%. That should free up some cash for people to either restore their personal balance sheets or purchase other stuff.

Read the full analyst report on “JNJ”
Read the full analyst report on “BMY”
Read the full analyst report on “PG”
Read the full analyst report on “CL”
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