Wednesday, December 16, 2009

Producer Prices Increase 1.8%; CPI Increases .4%

From the BLS:

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. In November, at the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.4 percent, and the crude goods index rose 5.7 percent. On an unadjusted basis, prices for finished goods moved up 2.4 percent for the 12 months ended November 2009, their first 12-month increase since November 2008.

About three-fourths of the November advance in the finished goods index can be traced to higher prices for energy goods, which jumped 6.9 percent. The indexes for finished goods less foods and energy and for finished consumer foods also contributed to the finished goods increase, both rising 0.5 percent.

Note that energy prices are currently decreasing. Should that trend continue I would expect a lower number next month. In addition, consider this chart of data from the same report:

Click for a larger image

Notice that producer prices have had two other large increases over the last 6 months, both largely caused by energy prices. Producer Prices dropped back down the next month on a decrease in energy prices. The "jumping around" effect is shown really well in the following chart:

Finally on PPI we have this year over year chart:

The fears of deflation are probably close to being extinguished at this point with the year over year increase.

From the BLS:

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months the index increased 1.8 percent before seasonal adjustment, the first positive 12-month change since February 2009.

The seasonally adjusted increase in the all items index was due to a 4.1 percent increase in the energy index. The index for gasoline rose sharply and the indexes for electricity, fuel oil, and natural gas also increased, creating the fourth consecutive rise in the energy index and the largest increase since August. In contrast, the index for all items less food and energy was unchanged in November, after ten consecutive monthly increases. Declines in shelter indexes offset increases in the indexes for new and used motor vehicles, medical care, airline fares, and tobacco.

Let's look at the data from the report.

First, we've had increases in 8 of the past 12 months. That is actually good news because it indicates we're probably clear of a deflationary threat. In the long-run that is very good news.

Notice the year over year number is now back in positive territory. This is the same pattern the PPI followed and it is also good news largely because it means we're probably clear of a deflationary threat.

Click for a larger image.

The primary reason for this month's increase was energy prices -- just like PPI.
NDD here, adding the following:

The same factors apply to the CPI as to the PPI. In short, it’s all about Oil – correlating with the run-up in Oil from $70 to $80/barrel.

Note that at the moment Oil is back down to $70/barrel which suggests that December may take back all of the November increase. In short, there are no real inflation concerns in the consumer number.

1.8% inflation with a ZIRP by the Fed = EZ money! And that means economic growth in the immediate future. If anything, the fact that YoY core inflation continues to be very low – only 1.7% again this month – is cause for concern in that there is very little cushion between here and institutionalized deflation (see Prof. Krugman re: this). The more present problem is that YoY PPI at 2.7% is higher than YoY CPI at 1.8%. If that is just a one month blip, it’s not a big deal. But if it continues, that means that producers are unable to pass on commodity price increases to already-strapped consumers, and that in turn is a recipe for yet another retrenchment in hiring and production.

Back over to Bonddad:

I would disagree regarding institutionalized deflation, largely based on the trajectory the year over year PPI and CPI have taken over the last 12 months. Both moved into negative territory and just now become positive. I think both are moving in the right direction and will continue to do so.

In summary, the jump in both producer and consumer prices was caused by energy prices which are currently declining. In other words, I think we're out of the woods for now.