U.S. PPI Jumps As Fuel CostsSurge; Core Prices Remain Strong

There was a broadening of inflationary pressure last month as measured by the producer price index. The PPI for finished goods jumped 1.8% after the tame 0.3% October increase. The rise was by far the largest increase in months and it lifted the y/y gain to 2.7%, its fastest since October of last year. In addition, the November increase was more-than-double the Consensus expectation.

Higher energy costs led the strength in the PPI last month. The 6.9% increase lifted the y/y increase to 10.6%, its strongest since September 2008. Gasoline prices increased 8.2% (35.9% y/y). Elsewhere, the gain in energy prices was more moderate. Fuel oil prices increased 10.8% but they remained down 7.1% from last year. Natural gas prices also increased a lesser 3.9% and they were down 15.6% from the year ago level. Food prices increased a moderate 0.5% but the increase left prices 1.6% lower than last year. Beef & veal prices were off 8.4% y/y, dairy product prices fell 7.3% and vegetable prices slumped 3.2% y/y.

Excluding food & energy prices rose 0.5% and reversed the October decline. The m/m increase in the core PPI contrasted with expectations for a modest 0.2% increase. The PPI for finished consumer goods less food & energy rose 0.5% (1.2% y/y) and also reversed the October decline.  Finished durables prices increased 0.6% (0.8% y/y) while core finished consumer nondurable goods prices rose a modest 0.4% (2.3% y/y). Capital equipment prices increased for the first time in three months. The 0.4% increase nevertheless left prices up just 0.4% y/y, nearly the weakest increase since 2003.

Prices for intermediate goods jumped 1.4%, reflecting the strength in energy prices. Core prices also firmed and the 0.3% increase reversed the October decline. The y/y gain in prices amounted to 0.3% which was a reversal from the 2.4% price deflation at the end of last year. Chemical, lumber and metals prices have firmed. The crude materials PPI again reflected the strength in energy prices and rose 5.7%. Core prices gave back the October gain but y/y were up 20.4% due to the improved economy.

The producer price data is available in Haver's USECON database. More detailed data is in the PPI and in the PPIR databases.· Bank Relationships and the Depth of the Current Economic Crisis from the Federal Reserve Bank of San Francisco can be found here. 

The ZEW indicator of investors sentiment in Germany declined for the third month in December.  The percent balance of opinion on macro expectations six months ahead is now at 50.4%, down 7.3 percentage points from the peak of 57.7% in September.  The current  level, however, is well above the long term average of 27.0%.  Although the balance between those respondents who view current conditions negatively over those who view them positively is still high at 60.6%, it declined five percentage points in December and is well below the peak, 92.8%, reached in May of this year when it was hard to find any optimists.  The first chart shows the percent balances for current conditions and the macro expectations over the next six months.

The survey is based on the opinions of 277 investors and analysts and took place from November 30 through December 14.  During that period, data on new orders, industrial production and retail sales for October were announced.  Industrial Production was down 1.86%, new orders for manufacturing were down 2.57%, motor vehicle sales were down 1.37% and retail sales, excluding motor vehicle sales, were flat.  These data suggested that the economic expansion might be somewhat slower than earlier expectations and may have dampened some of the optimism of the participants.

In spite of the decline in the overall outlook, participants in the survey are still relatively optimistic regarding the profit outlook.  There are only four industries out of the thirteen industries surveyed where the current balance of opinion is for lower profits.  These are: banking, construction, utilities and services.  They are shown in the second chart.   Of the remaining industries--insurance, chemicals/pharmaceuticals, steel/metal, electronics, machinery, telecommunications, information technology--the balance of opinion is for higher profits; and for vehicles/automotive and consumption/trade, the balance of opinion is for smaller losses.  The balance of opinion for higher profits has risen significantly for the information technology, machinery, steel/metal and chemicals/pharmaceuticals industries, as can be seen in the third chart. 

Industrial production resumed the increase that began this past July. The November 0.8% gain followed an unrevised unchanged reading for October and it exceeded Consensus expectations for a 0.6% rise. The improvement from October was across-the-board but it was greatest in the construction supplies and in the materials areas. Output of consumer goods rose a moderate 0.3% and that was led by a 2.9% (-13.5% y/y) increase in furniture production and a 1.9% (-6.9% y/y) increase in motor vehicle output. Output of machinery also rose (-19.7% y/y) as did computers & electronics (-4.0% y/y) production. Less the motor vehicle & high-tech sectors output increased 0.8% (-5.1% y/y) last month.

During November, production increases amongst industries sagged somewhat to 52.9% of the total from the high of 60.6% during August. The breadth of increase from last July also dipped to a still-firm 59.9%, near the strongest since early-2007.

Capacity utilization rose further to 71.3%, its highest level since December. In the factory sector alone utilization rose to 68.4%. Utilization in the primary metals area has risen sharply to 59.1% with the rebound in output. There's also been a slight rise in utilization in the machinery area but it's down most elsewhere. The overall increase was caused by another estimated 0.1% (-0.9% y/y) decline in industry capacity.

The industrial production data are available in Haver's USECON database.