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Producer Prices & Inflation

Posted By Barry Ritholtz On December 19, 2006 @ 10:48 am In Commodities,Consumer Spending,Data Analysis,Federal Reserve,Inflation,Retail | Comments Disabled

Tales of Inflation’s demise have been greatly exaggerated.

Core_ppi [1]PPI — the prices for finished goods, not raw materials — leapt 2% in
November, the greatest gains in 32 years (November 1974). Core PPI
excluding food and energy swelled 1.3% — highest since July 1980, erased the 0.9% drop last month.

The numbers were significantly above Wall Street median forecast 0.7% month-on-month increase (0.3% core rise).

Bloomberg [2] reported:

"The producer price index climbed 2 percent in November from
a month earlier, led by higher costs of energy and light trucks,
the Labor Department said today in Washington. Housing starts
rose at an annual rate of 1.588 million last month, more than
forecast and 6.7 percent higher than in October, the Commerce
Department said. Building permits declined.         

Six months of slowing economic growth haven’t defeated
inflation, the wholesale price report indicates. Fed Chairman
Ben S. Bernanke has predicted a pickup in the expansion,
suggesting that policy makers are reluctant to reduce rates in
coming months."

Let’s all agree to the following: Regardless of which set of numbers you choose to believe or disbelieve, our personal experience is that inflation continues to exist, although it may be moderating somewhat. I will admit that the November PPI overstates inflation — I sincerely doubt prices are rising at an annual rate of 24% — if you care to admit that 0.0% is just as nonsensical.

Ppi_monthly_percent_change [3]For the rolling 12 month period ending in November, wholesale prices rose
0.9%. Sicne energy prices collapsed follwoing the changes inthe GSCI, inflation has been below levles seen in the spring and summer. Year over year, core PPI was up 1.8%.

How did the numbes break down? WSJ [4] reports:

"Tuesday’s report showed producer prices for energy
increased 6.1% last month compared to October. Gasoline rose 17.9%, the
highest monthly rate since June 2000. Gas prices had fallen sharply the
previous two months. Residential natural gas increased 5.9% last month.
Food prices increased 0.1%.

Wholesale prices of passenger cars increased 2.2%,
while wholesale light truck prices soared a record 13.7%. Car and light
truck prices had tumbled in October due in part to new quality
adjustment measures incorporated by government statisticians. Capital
equipment prices rose 1.4% last month.

Deeper in the production pipeline, price pressures
remained generally elevated. Prices of raw materials, known as crude
goods, rose by 15.7%, while excluding food and energy they rose 0.5%.
Intermediate goods prices rose 0.7%, but were down 0.3% excluding food
and energy."

Market sold off in reaction to the data, with the Dow and SPX holding up fairly well (off less than 0.2%), while the Transports were down ~1.0%, and the Nadaq 100 was lower by 0.85% (if that’s what defines your reality).

Bottom line: Inflation is nowhere near as nonexistent as the Markets were believing on Friday. That CPI data was a goof.

If I can, I’ll follow up on Home Permits, Construction and Sentiment today or tomorrow, all of which belies the "Real Estate is bottoming" crap you may have heard from the Usual Suspects [5].




Producer Price Indexes [6]
Finished goods: +2.0%(p) in Nov 2006;
Finished core: History  +1.3%(p) in Nov 2006
Bureau of Labor Statistics December 19, 2006

U.S. Economy: Producer Prices Soar [2]
Shobhana Chandra and Robert Willis
Bloomberg, Dec. 19 2006

Producer Prices Climbed in November, Suggesting Inflation Pressures Linger [4]
WSJ, December 19, 2006 9:31 a.m.

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/12/producer-prices-inflation/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/core_ppi.gif

[2] Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=alSgWzx.V4yA&refer=home

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/ppi_monthly_percent_change.png

[4] WSJ: http://online.wsj.com/article/SB116653481595854491.html

[5] Usual Suspects: http://www.amazon.com/exec/obidos/ASIN/B00005V9HH /thebigpictu09-20

[6] Producer Price Indexes: http://www.bls.gov/ppi/

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