September PPI Up 1.9%: Spillover Effects?

The overall Producer Price Index jumped 1.9% last month, easily surpassing Consensus expectations for a 1.1% increase. The gain was the largest since January 1990 and was led by a 7.1% leap in energy prices which also was the strongest since 1990.

The so called "core" PPI index is focused on since it provides an indication of the degree to which pressures on energy or food prices may be "spilling over." Finished goods prices less food & energy increased 0.3% in September. The rise beat Consensus expectations for a 0.2% increase and followed no change in prices during the previous month.

And these spillover effects may indeed be now more apparent than earlier for several reasons. 1) The y/y change in core prices held at 2.5%, up from 0.1% and 0.2% during 2002 and 2003, respectively. 2) Prices for core consumer goods rose 0.2% and the y/y gain held at 2.6% versus a 0.1% increase in 2003. 3) Capital equipment prices rose 0.3%. The y/y gain rose to 2.3% from -0.4% during 2002 despite a 22.1% y/y decline in computer prices. That drop was comparable to the 22% and 25% price declines during 2001 and 2002.

Consumer durable goods prices rose 0.4% (+1.5% y/y) led by increases in floor coverings (7.5% y/y), household furniture (3.6% y/y) and jewelry (3.8% y/y). Core consumer nondurable goods prices rose 0.2% (3.6% y/y).

Gasoline prices jumped 12.8% (63.6% y/y) while fuel oil prices surged 11.3% (57.1% y/y). Natural gas prices also posted a strong 8.1% (24.7% y/y) increase and in October the spot gas price has pushed nearly to $14.00/mmbtu, more than double the year ago level.

Intermediate goods prices surged 2.5%, the strongest monthly increase since 1980 while core intermediate goods prices rose 1.2%, the strongest gain since April of last year.

A 16.9% (64.4% y/y) spike in crude energy prices lifted overall crude goods prices by 10.2%.and that pulled the y/y gain to its highest since early 2003. Core crude prices jumped for the third straight month. 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.

Federal Reserve Board Chairman Alan Greenspan's speech on Energy is available here.

Inflation Expectations: How The Market Speaks from the Federal Reserve Bank of San Francisco can be found here.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

The results of Germany's latest ZEW survey, released today, were below consensus, showing only a slight improvement in October in the balances between optimists and pessimists among German institutional investors and analysts regarding current economic conditions and those expected six months ahead. The disappointing results of the survey may be due, in part, to the uncertainty arising out of the inconclusive election held last month. A coalition government between the CDU/CSU (Christian Democratic Union, and Christian Social Union), with their narrow victory of four seats, and the SPD (Social Democratic Party) has been agreed upon with Angela Merkel as Chancellor.However, the process of selecting a cabinet, now underway is revealing what may be potentially serious differences among the possible candidates. The process is not expected to be over much before November 17 when the Bundestag formally installs the new Chancellor and pronounces the new government operational.

Pessimists continue to outweigh optimists in their appraisal of current conditions. The balance between those expecting current conditions to improve and those who expect them to worsen rose a mere one-tenth of one percent from -58.1% to 58.0%. When they look ahead, the respondents to the survey are more optimistic. The balance between those expecting better conditions six months ahead and those expecting worse conditions rose by 0.8% in October to 39.4% from 38.6% in September. The contrast between the respondents' appraisal of current conditions and their appraisal of expectations six months ahead is shown in the first chart.

Inflation is another factor that may be influencing sentiment among institutional investors and analysts.Eurostat published today the Harmonized Consumer Prices Index for the Euro Zone and the individual countries of the area. In addition, indexes of core inflation, defined as the total index excluding, energy, food, alcohol and tobacco, are also published. For Germany, the year to year increase in the total index was 2.61%, up from 1.89% in both August and July. Although core inflation also rose, it remains at low levels, lower than in some of the earlier months of the year. Core inflation was 0.56% in September, compared with 0.46% in August and 055% in July. The Harmonized Consumer Price index and its related Core Inflation index are shown in the second chart.