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Economy in Brief

Producer Price Index Down, Core Prices Firm
by Tom Moeller March 21, 2006

The Producer Price Index for Finished Goods fell 1.4% last month. It was the largest decline in the index since April 2003 and easily outpaced Consensus expectations for a 0.3% decline.

Producer prices less food & energy (core), however, rose 0.3% and were stronger than expectations for a 0.1% increase. The gain was boosted by strength in floor coverings (9.4% y/y), mobile homes (4.9% y/y), construction machinery (6.6% y/y), power transformers (9.7% y/y), heavy motor trucks (4.1% y/y) and civilian aircraft (4.3% y/y).

Prices of all finished consumer goods less food & energy rose 0.2% (1.8% y/y) and core consumer nondurable goods prices increased 0.4% (2.8% y/y). Capital equipment prices increased a modest 0.1% (1.5% y/y), held back by another decline in electronic computer prices (-22.6% y/y).

Finished energy prices slumped 4.7% (+16.9% y/y) during February as gasoline prices dropped 11.0% (+18.4% y/y). Home heating oil also fell by 1.1% (+29.0% y/y) along with natural gas prices which fell 4.1% (+25.6% y/y). Residential electric power costs were unchanged after a 3.0% January rise (8.8% y/y).

Intermediate goods prices eased 0.3% after the 1.2% January surge although core intermediate prices continued strong with a 0.5% advance.

Crude goods prices dropped sharply as crude energy prices tumbled 16.2% (+26.0% y/y). In March, the volatility in crude oil prices has left the average about even with last month. Core crude prices rose a sharp 3.3% on the strength of high prices for copper base scrap (59.4% y/y), aluminum scrap (30.3% y/y) and iron & steel scrap (3.9% y/y). During the last thirty years "core" crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.

Reflections on the Yield Curve and Monetary Policy, remarks by Federal Reserve Board Chairman Ben S. Bernanke can be found here.

Producer Price Index Feb Jan Y/Y 2005 2004 2003
Finished Goods -1.4% 0.2% 3.8% 4.9% 3.6% 3.2%
  Core 0.3% 0.4% 1.7% 2.4% 1.5% 0.2%
Intermediate Goods -0.3% 1.2% 8.2% 8.0% 6.6% 4.7%
  Core 0.5% 1.0% 4.8% 5.5% 5.7% 2.0%
Crude Goods -9.2% -0.5% 12.8% 14.6% 17.5% 25.1%
  Core 3.3% -0.1% 11.9% 4.9% 26.5% 12.4%
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