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Economy in Brief

Key Trends In Producer Prices
  Mar-07 PPI Trends By Type Of Good
PPI 1-Mo (M/M) 3-Mo, AR 6-Mo, AR 1-Yr Yr-Ago
Total PPI 1.0% 6.9% 5.2% 3.1% 3.6%
Finished Consumer Gds 1.4% 8.6% 6.1% 3.5% 4.4%
Consumer Foods 1.4% 18.7% 10.9% 7.9% -1.2%
Finished Consumer Goods Excl Foods 1.3% 5.1% 4.3% 1.9% 6.6%
Nondurables less Food 1.9% 7.7% 5.7% 2.5% 9.1%
Consumer Nondur ex Food & Energy 0.4% 5.9% 3.5% 2.3% 3.0%
Durable Goods -0.3% -0.9% 1.0% 0.6% 0.4%
Finished Core Consumer Goods 0.1% 3.1% 2.4% 1.5% 1.9%
Capital Goods -0.1% 1.9% 2.3% 2.0% 1.5%
Manufacturing Industries 0.0% 2.7% 2.5% 2.8% 1.9%
Nonmanufacturing Industries -0.1% 1.4% 2.2% 1.6% 1.3%
Core PPI 0.0% 2.3% 2.3% 1.6% 1.7%
Memo: Finished Energy 3.6% 9.4% 8.0% 2.8% 15.7%
           
The PPI has two headlines each month. One for the overall PPI, and one for the core. The core is the measure that excludes food and energy and that markets follow most closely. This month neither headline gives a true picture of what is going on in the PPI itself.

As good as it gets…
Inflation is neither as strong as the 1% headline on the PPI nor as docile as the 0% rise in the core. Not surprisingly, the truth lies in between. Core inflation is the measure we prefer and the Fed prefers. But the indicators that the Fed prefers to apply the core definition to are broader than the PPI: they are the PCE deflator or the CPI index. These measures include the services sector that the PPI leaves out. That sector has been much more inflation prone than the core goods sector that we can expose for examination in the PPI. So when you look at the core PPI you are usually seeing inflation as good as it gets.About that CPI signal…
The table above gives us several readings on the PPI. The headline‘s main trend statistics are presented in the top line of the table; the PPI core is in the line that is second from the bottom. But the line that is more useful to us in the middle, entitled "finished core consumer goods". This is the part of the PPI that fits directly into the core CPI number that the Fed does care about. Notice that the core for the CPI at the producer level shows a rise of 0.1%. It is stronger than the PPI’s overall core because it excludes capital goods where prices fell in the month.And the CPI trends? Don’t ask….
Even more troubling than this minor one-tick change for the core as it applies to consumer goods is the adverse trend for this CPI Core series at the producer level. Finished core consumer goods at the producer level (FCCPPI) show steadily accelerating inflation. This is despite the small 0.1% up tick in March.  Inflation has stepped up from 1.5% over 12-months to 2.4% over six months to 3.1% over three months (all SAAR). This progression is disturbing. Within the FCCPPI we find conflicting trends. Nondurable goods excluding energy and food are up by 0.4% in March and have their own -- much higher -- inflation progression in train (see table). But durable goods are tempered. Indeed, durable goods prices fell in March and they are showing a mixed tendency to decelerate over the course of the past year (see table).
The chart on the left looks at these trends using only the Yr/Yr tabulations Even so we can see that consumer durable goods inflation trends are turning lower. The upturn in nondurable core trends is also apparent as it turns higher. Capital goods trends are shown to hover at an inflation pace of about 2%. The core PPI, torn between these various trends, is in a slight downtrend itself.What’s the point of a sullied point estimate?
If I can make an obvious point here it is that with such disparate trends within the core PPI, it is obvious that the core is not very representative of its components. You can average (or weight-average) anything. But that does not make the resulting measure useful. We assert that the core inflation measure from the PPI is simply not useful in these circumstances. While we do need some assessment on the overall price level to tell what it is doing, (the Fed surely does) it should be clear that with important components moving in different directions final judgment depends on the weight applied to each. And since weighting is a controversial issue we would urge a great deal of caution in dealing with the trends core measures produce when components are flying every which way.  If you peruse the chart on the left on component PPI Core trends you can see that this sort of trend convolution is not the norm. While the various core components often have differing rates of inflation, the direction is usually about the same even if the speed is not. Developments in PPI core inflation in early 2007 are odd indeed.

On balance, the PPI is a report that can please no one. Inflation is still in a sort of twilight zone: too high to be comfortable but with yet enough moderation for the Fed to play along with it for a while – if it so chooses. And there are plenty of convoluted – or at least contrary - trends to choose from within the PPI core. What is most disturbing however is the knowledge that inflation in services tends to be stronger. That seems to imply that an uncomfortable CPI still lies ahead. The core goods portion of inflation has been the best behaved part of the CPI for some time.  Inflation is now most troublesome in the services sector. As we move on to measures that include that sector next week with a goods sector inflation rate in hand that is itself a bit uncomfortable, disappointment seems to be the most likely result.

Be prepared…
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