Thursday, July 15, 2004

It's Thursday, so I'll take this small opportunity to toot my own horn. Yesterday I noted that agricultural commodity prices have been plummeting over the past two months, and suggested the bloom may already be off the rose of the recent US flirtation with general inflation. The producer price index report released this morning confirms the analysis.
The Bureau of Labor Statistics of the U.S. Department of Labor reported today that the Producer Price Index for Finished Goods decreased 0.3 percent in June. This decline followed a 0.8-percent rise in May and a 0.7-percent increase in April. Prices for finished goods other than foods and energy went up 0.2 percent in June, as opposed to a 0.3-percent increase in the prior month. At the earlier stages of processing, prices
received by manufacturers of intermediate goods rose 0.5 percent, compared with a 1.1-percent jump in the preceding month. The index for crude materials advanced 1.6 percent in June, after posting a 2.8-percent rate of increase a month earlier.
The PPI for food fell sharply, -0.6%, after three straight months of monthly inflation over 1.2%. This effect should start showing up in the consumer price index soon. Food and beverages make up 15.4% of the CPI, and outside of gasoline (3.2% of the CPI; always having its ups and downs) and medical care and education (together composing 8.9% of the CPI; perennial sites of inflation), contributed the most to US consumer inflation this past year. It's high rate of inflation plus its weight in the CPI means that falling food prices should take a huge bite out of consumer inflation.

Core producer prices are not yet falling, and neither are prices of intermediate or crude goods -- yet. We are seeing marked disinflation however. Oil seems happy to hover around $40/barrel, commodity prices are retracting, and manufacturing overproduction is still the underlying story. The real interesting twist in all of this is that the Fed may stop raising interest rates. I'd be surprised if they stay at 1.25% for long, but 1.5% may be a resting place for a while.

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