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Economy in Brief

U.S. PPI Firmer Than Expected
by Tom Moeller February 19, 2009

U.S. producer prices for finished goods rose 0.8% during January following five consecutive months of sharp decline. Despite the latest monthly increase, however, the year-to-year change of -1.3% was the softest since late 2002.

A 3.7% rise (-19.2% y/y) in finished energy prices was responsible for much of the lift to the January PPI.  It reversed some of a 9.1% December drop.  The increase was the first rise in energy costs in six months and was led by a 15.3% pop (-45.0% y/y) in gasoline prices.  Home heating oil prices rose a lesser 1.6% (-41.7% y/y) but natural gas prices fell 1.5% (+4.5% y/y).

Lower finished food prices offset some of the upward lift from energy costs.  The 0.4% January decline lowered the year-to-year increase to 2.0% from its high of 9.1% this past summer.  The moderation in food price inflation occurred because of a 6.2% annual rate of decline in overall food prices during the last three months. The drop was led by lower meat, vegetable and dairy product costs.

Less food & energy, prices were strong last month. The 0.4% increase in PPI less food and fuels was double expectations and followed two months of 0.1% and 0.2% gain.  Year-to-year the gains have been firm, stable (above 4.0% since September) and apparently insensitive to the economic downturn.  Prices of core finished consumer goods rose 0.4% last month and the annual rate of gain was 4.2%. Durable consumer goods prices also jumped 0.4% in January and were up 3.1% y/y.  Appliance prices surged 3.9% y/y, nearly their strongest since 1989, while core nondurable goods prices strengthened to a 5.4% y/y increase, also near the fastest rise since early 1999.  In addition, prices for capital equipment firmed and rose 4.0%, again the strongest since 1989.

As was the case last month, lower prices for intermediate goods may portend softer gains in finished goods prices coming down the pike.  Intermediate goods prices fell 0.7% during January and are down 3.7% year-to-year, the weakest since 2002.  Excluding food & energy, prices fell for the fourth consecutive month and the 1.1% drop left the year-to-year change at 1.2%.  Core prices increased 7.6%  during all of last year.

The crude materials PPI fell for the sixth straight month and is the most sensitive to current weakness in the economy. The 2.9% decline in the total was led by an 8.1% drop  (-39.8% y/y) in energy prices.  Crude food prices did rise by 1.0% last month but year-to-year they fell 15.5%. Less food & energy, January crude prices ticked higher by 0.1% following five months of sharp decline.

The Producer Price Index data is available in Haver's USECON database. More detailed data is in the PPI and in the PPIR databases.

Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet is yesterday's speech by Federal Reserve Chairman Ben S. Bernanke and it can be found here.

The Federal Reserve on Wednesday released, for the first time, longer-run economic projections made by Federal Open Market Committee (FOMC) participants--the Federal Reserve Board members and Federal Reserve Bank presidents--in connection with their regular quarterly projections. The release can be found here

Producer Price Index (%) January December Y/Y 2008 2007 2006
Finished Goods 0.8 -1.9 -1.3 6.4 3.9 2.9
  Core 0.4 0.2 4.2 3.4 2.0 1.5
Intermediate Goods -0.7 -4.2 -3.7 10.5 4.0 6.4
  Core -1.1 -2.9 1.2 7.6 2.8 6.0
Crude Goods -2.9 -5.3 -28.9 21.2 11.9 1.4
  Core 0.1 -2.2  -27.8 15.0 15.6 20.8
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