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Economy in Brief

PPI Headline Spurts As Core Is Stable
by Robert Brusca September 15, 2009

The PPI headline spurted by 1.7% in August as the core rose by 02% and core for consumer prices at the producer level edged up by just 0.1%. Finished energy prices rose by 8% in the month. The headline displays an accelerating pattern of growth rates for 12-month to 6-month to 3-month rates of inflation. But the core pattern has been more settled and core pattern for consumer prices at the producer level has been even more tranquil.

We learned from the last time energy prices spiked in the recession that a transmission of their gains to the core was not automatic. Rising energy prices have both inflationary and deflationary effects. When consumers and firms do not have the power to bargain for wage and price hikes, as is the case now, it is more likely that rising energy prices impact growth adversely instead of impacting inflation positively.

Still what we are seeing here are volatile price movements. Energy prices have had a standard deviation of 5 percentage points on the month to month percentage changes since the recession began. That kind of volatility tends to impart considerable uncertainty into the headline PPI each month.

The 8% m/m rise in energy prices in August is the largest since a 10.2% gain in November 2007. Energy prices are up in four of the last five months and in six of the last eight months. Prior to that energy prices had fallen for five months in a row.

Spot oil prices on world markets, however, have been hovering around the $70/bbl mark for a number of months. Oil prices have been playing catch up since the recession has come off its worst of times and oil prices have bounced and are trying and find a new higher equilibrium.

For now the core PPI price patterns are reassuring. Since global oil price trends are not running away we can look for the energy market in the US to find a level that is consistent with global prices and for the energy component of the PPI to settle down. It does not look very inflationary now in this economy but we are looking for recovery to set in. As that happens the risk will multiply and the potential for inflation to take root will improve somewhat. I am no inflation monger. But circumstance will change. For now inflation is not the worry, it’s just a bad monthly result in the least important of all US inflation reports.

Long live the CPI and the PCE deflator where trends are more important. In that regard the tranquil inflation embedded in core consumer prices at the producer prices level is reassuring.

Key Trends In Producer Prices
  Aug-09 PPI Trends By Type Of Good
PPI 1Mo:M/M 3-Mo:ar 6-Mo:ar 1-Yr Yr-Ago
Total PPI 1.7% 11.0% 4.3% -4.3% 9.8%
Finished Consumer Gds 2.3% 14.4% 5.5% -5.9% 11.7%
  Consumer Foods 0.4% 0.0% -1.7% -3.9% 9.1%
  Finished C Gds Excl Foods 2.9% 19.5% 8.1% -7.0% 12.7%
    Nondurables less Food 3.9% 26.6% 10.4% -10.4% 16.6%
  ConsNonDurxF&E 0.0% 1.9% 2.0% 3.0% 5.4%
  Durable Goods 0.3% 2.8% 2.1% 2.5% 2.2%
Finished Core Cons Gds 0.1% 2.2% 2.0% 2.8% 4.0%
Capital Goods 0.3% 2.3% 0.6% 1.8% 3.3%
  MFG Industries 0.1% 0.8% 0.3% 0.6% 3.9%
  NonMFG Industries 0.3% 2.9% 0.8% 2.2% 3.1%
Core PPI 0.2% 2.4% 1.4% 2.3% 3.8%
Memo: Finished Energy 8.0% 59.6% 19.8% -21.3% 27.9%
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