Tuesday, November 18, 2008

PPI Drops Most on Record

From the BLS:

The Producer Price Index for Finished Goods fell 2.8 percent in October, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 0.4-percent decline in September and a 0.9-percent fall in August. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 3.9 percent in October after declining 1.2 percent in September, and the crude goods index dropped 18.6 percent subsequent to a 7.9-percent decrease in the previous month.


For the 12 months ended in October, finished goods prices advanced 5.2 percent. Over the same period, prices for finished consumer foods climbed 6.5 percent, the index for finished energy goods increased 5.5 percent, and the index for finished goods other than foods and energy rose 4.4 percent. From October 2007 to October
2008, prices received by intermediate goods producers advanced 10.2 percent, while the crude goods index decreased 1.4 percent.

There are two things we learn from the above points.

1.) Producer prices are dropping fast, and

2.) Although the year over year is still high I wouldn't expect that trend to continue. Consider this chart from econoday:

Click for a larger image

That's a healthy drop. Also consider the following from Bloomberg:

Prices paid to U.S. producers plunged in October by the most on record as the faltering global economy caused demand for commodities to dry up.

The larger-than-forecast 2.8 percent drop followed a 0.4 percent decline in September, the Labor Department said today in Washington. So-called core producer prices that exclude fuel and food rose 0.4 percent, indicating that the declines in raw- material costs have yet to feed through to other products.

Today's figures, along with a U.K. government report showing Britain's inflation rate fell the most in at least 11 years, show a rising threat of deflation. That's likely to spur central banks to keep cutting interest rates, with some benchmarks approaching zero percent, economists say.

``The broad-based softening of prices shows inflation is contained, and disinflation is taking hold,'' John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey, said before the report. ``It gives the Fed the ammunition to cut rates further.''

Now we're seeing more and more talk of deflation -- a period of dropping prices. Considering that real estate has been falling for awhile now and companies are doing everything they can to attract a reluctant consumer expect this kind of talk -- and this trend -- to continue.