Thursday, June 17, 2004

Yesterday the inflation chicken littles were kept under wraps by an "expected" rate of core consumer price increase for May. Today after the release of the long-awaited May producer price index, they're running loose all around the chicken coop.
Last month's producer price index for finished goods rose 0.8 percent, the largest increase since March 2003. Core producer prices, excluding food and energy goods, rose 0.3 percent.

Over the past year ended in May, the PPI has risen 5 percent, the largest 12-month increase since December 1990. The core PPI has risen 1.7 percent over the past 12 months, the greatest increase since January 2001.

The increases in the PPI and the core rate were above expectations. Economists surveyed by CBS MarketWatch had forecast a 0.6 percent rise in overall PPI and a 0.2 percent increase in core prices. Treasury prices fell and yields rose in response to the PPI report.
Now to be fair, economists interviewed think this is all much ado about nothing, and while it's not quite nothing, it's pretty close to it.

For example, since May of last year seasonally-adjusted core finished goods prices are up just 1.7%, and that after more than two years of price stability -- 0% inflation. Over the last three months the rate has been steeper, but annualized it is still only 2.9%.

Jump over to intermediate goods and the core price rises are higher -- 5.1% since May 2003 (seasonally-adjusted) and over the last three months, 10.7% annualized. That's a pretty steep climb, but not unusually so. For six months in late 1994 and early 1995 core producer prices on intermediate goods ran up at a 9.9% annualized rate. Over the same period CPI was running at just a third of that.

The continuing lack of pricing leverage for manufactured goods means that profits will get squeezed more than consumer prices will rise. For now, the underlying story is still about disinflation/deflation rather than inflation.

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