After falling over 2% to start the trading week, stocks fared little better on Tuesday. Markets received a host of economic data, including a report showing that industrial production declined for a 7th straight month. Inflation fears however should be tempered after a lower than expected PPI reading. By the closing bell, the Dow Jones industrial average fell 107.46, or 1.3 %, to 8,504.67. The blue chips have lost 3.3% so far this week The Standard & Poor’s 500 index fell 11.75, or 1.3 %, to 911.97, while the Nasdaq composite index fell 20.20, or 1.1 %, to 1,796.18.

The bond market advanced, with rising prices pushing the yield on the 10 year treasury down 4 basis points to 3.68%

What Inflation?

The Producer Price Index, which measures wholesale prices, rose by a seasonally adjusted 0.2 % from April, in a Labor Department report. That was below analyst expectations of a 0.6 % rise as a big jump in the price of gasoline offset a drop in food costs.

Despite the increase, wholesale prices fell 5 % over the past 12 months. That was the largest annual drop in nearly 60 years. Excluding volatile food and energy prices, the core PPI dropped 0.1 % in May, also below analysts’ forecasts of a 0.1 % rise.

The PPI is a good indication of future inflation, and this report should calm the fears of the bond vigilantes that the fiscal and monetary stimulus that the government has undertaken will lead to rampant inflation.

I believe that part of the market drop today was in part to the poor PPI numbers. In this environment, higher prices at the wholesale level indicate strengthened demand. Such low numbers may imply any solid recovery is further off into the year.