Wednesday, January 17, 2007

PPI Increases .9% in December

From the BLS:

The Producer Price Index for Finished Goods increased 0.9 percent in December, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 2.0-percent advance in November and a 1.6-percent decline in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.5 percent in December after climbing 0.7 percent a month earlier, and the crude goods index increased 2.9 percent following a 15.7-percent gain in November.

Finished food products had the largest jump in 12 months, increasing 1.7%, while finished energy prices increased 2.5%.

The number ex-food and energy increased .2%.

The best news in the report was the 1.1% 12-month percentage change in the PPI from last December.

Both Reuters and Bloomberg note the number rose more than forecast, indicating traders may be taken back by the news.

Here's how Bloomberg reported the news:

Prices paid to U.S. producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline costs that have since reversed.

The 0.9 percent gain in the producer price index followed a 2 percent increase in November, the Labor Department said today in Washington. So-called core wholesale prices that exclude energy and food rose 0.2 percent after rising 1.3 percent.

Crude oil costs have dropped 20 percent since mid-November, and some raw-materials prices have also decreased. The declines may reassure Federal Reserve policy makers that price pressures will ease. Dallas Fed Bank President Richard Fisher said last week that there's been ``encouraging news'' on inflation, and he's ``very comfortable'' with the level of interest rates.

``We have seen a notable moderation in year-over-year wholesale inflation in the second-half of the year,'' Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. The smaller increases ``suggest less inflation risk in the pipeline, which is a favorable development for the Fed.''

Reuters reported the news thusly:

U.S. producer prices rose slightly more than expected in December but they advanced at a far more moderate pace than a month earlier on smaller gains in energy prices, a government report on Wednesday showed.

The Labor Department's Producer Price Index advanced by 0.9 percent in December. Excluding volatile food and energy prices, the index inched up a smaller 0.2 percent. Still, the gains were slightly greater than expected.

Economists polled by Reuters ahead of the report were expecting a 0.5 percent rise in the overall index and a more moderate 0.1 percent advance in the so-called core PPI, which excludes food and energy prices.


Economists had forecast producer prices to rise 0.5 percent, according to the median of 70 estimates in a Bloomberg News survey. Estimates ranged from a 0.1 percent decline to a 1.2 percent rise. Core prices were expected to rise 0.1 percent.

Both reports noted the official government number came in higher than expected. This means traders may be taken back by the number.

Since December, copper has fallen in a big way (see below). Aluminum has dropped as well, although not as precipitously. Oil has also dropped, helped by Goldman Sachs rebalancing its commodities index. It is now at a 20-month low and is looking to test technical support at $50/bbl. All three of those figures bode well for next month's PPI -- assuming those trends remain in place. They also mean the markets are essentially doing the Fed's work for them -- dropping prices and reducing inflationary pressures so the Fed doesn't have to increase interest rates.

However, I think this number is too high to warrant talk of a rate cut anytime in the near future. All recent Fed speeches have included statements to the effect they think inflation is still a concern. This number will not ease those concerns.