U.S. December PPI Fell Again; 2008 Strength in Pricing Abruptly Ends

U.S. producer prices for finished goods fell 1.9% last month versus expectations for a 2.0% drop. The decline was the fifth in as many months. Nevertheless, 2008 was a year when price increases as a whole were stronger than during 2007. The 6.3% increase in the overall Producer Price Index compared to a 3.9% rise one year earlier and it was the firmest since 1991.  Several month-to-month increases, which exceeded 1.0% early in 2008, were responsible for that lift.

Gains in energy prices were responsible for much of the acceleration in the PPI last year. Though they fell 9.3% last month, down for the fifth consecutive month, for all of 2008 they rose 14.0% and that was double the 2007 increase. December-to-December energy prices fell 21.2%. That decline was enough to lower the level of finished energy prices in December to that of mid-2005.  Therefore, much more sanguine news on pricing is in the cards for this year.

Finished consumer food prices also eased during the last three months and in December they fell 1.5%. That lowered the December-to-December increase to a moderate 3.8%. Nevertheless, for all of last year food prices rose a strong 6.9% which was about the gain they posted in 2007.  Large monthly increases early in the year were responsible for that lift and they were led by a 6.5% rise in meat prices, which was double the 2007 rise, and a 34.5% rise in pasta product prices.

Less food & energy, prices also firmed in 2008. First, the December increase of 0.2% was double Consensus expectations. That gain followed a slim 0.1% increase one month earlier but these followed four consecutive monthly increases between 0.4% and 0.6%. The y/y rise in the core PPI of 4.3% was nearly the strongest since late-1989. Prices of core finished consumer goods rose 0.3% last month and that ended a year when they increased 4.5% from December-to-December. The gain was the strongest since 1989. Durable consumer goods prices jumped 0.5% last month and were up 3.2% y/y. Appliance prices jumped 3.8% y/y, their strongest since 1989, while core nondurable goods prices strengthened to a 5.6% y/y increase, also the fastest rise since early 1999.  In addition, prices for capital equipment firmed and rose 4.0%, again the strongest since 1989.

Lower prices for intermediate goods may portend easier price gains in finished goods prices this year.  They fell 4.2% last month and repeating their decline in November.  Energy prices dropped 9.5% (-20.4% y/y).  Excluding food & energy, prices fell for the third consecutive month.

The crude materials PPI was down sharply for the fifth straight month. Energy prices led the fall with a 6.0% (-33.4% y/y) drop and crude food prices fell 5.3% (-13.9% y/y). Less food & energy, crude prices fell 2.2% with the recent drop in commodity prices.

The latest Beige Book from the Federal Reserve which covers regional economic conditions can be found here.