Friday, August 13, 2004

The deflation monster is back. He's lurking in the shadows still, but you can start to hear him panting again.
The Producer Price Index for Finished Goods rose 0.1 percent in July, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed a 0.3-percent decline in June and a 0.8-percent jump in May. Prices for finished goods other than foods and energy increased 0.1 percent in July, following a 0.2-percent rise in the previous month. At the earlier stages of processing, prices received by manufacturers of intermediate goods advanced 0.8 percent, compared with a 0.5-percent gain in June, while the crude goods index edged down 0.2 percent, after climbing 1.6 percent in the prior month.
The core PPI increase in July was the lowest since February, and positive at all surely because of the knock-on effects of the huge 2.3% monthly increase in producer energy costs. Wholesale food prices have fallen now two months in a row.

Perhaps most notably, the price of crude goods actually fell in July, the first time since August 2003, again mostly due to a massive fall (-4.8%) in crude food prices. Corn prices and fluid milk prices completely tanked (but do you think you'll see cheaper yogurt at the store? Don't count on it).

The dramatic slackening of food prices will certainly impact the CPI for July. Food and beverages are over 15% of the consumer price index and a big source of inflation over the last year. If it wasn't for skyrocketing oil prices -- NYMEX prices as high as $45.70/barrel today -- we could be looking at another economy-wide deflation scare.

UPDATE: September delivery light sweet crude on the NYMEX went as high as $46.65/barrel on Friday before closing at $46.58. Damn! We're getting into spitting range of mid-October 1990's recent record price -- adjusted for inflation, just over $56/barrel.

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