Tuesday, November 16, 2004

Well, well, it seems that the October inflation figures at the producer level took everybody by surprise.
U.S. producer prices shot up 1.7 percent last month, the biggest gain in nearly 15 years and well above expectations, as energy costs skyrocketed and food prices surged, a government report showed on Tuesday.

Even outside of food and energy, producer prices climbed a relatively swift 0.3 percent in October, the Labor Department said, well ahead of the 0.1 percent gain Wall Street had expected.

The increase in the overall Producer Price Index, a gauge of prices received by farms, factories and refineries, was the largest since January 1990 and easily outstripped expectations for a 0.5 percent gain.
Big gains in energy prices were predictable and predicted, but a 6.8% rise in just one month was obviously more than folks bargained for. By comparison, the huge oil price spike in July 2004 (when NYMEX prices jumped over $7/barrel) translated into just a 2.4% rise in the PPI.

A big leap in producer food prices was a bolt out of the blue. The 1.6% rise was the largest since October 2003 and followed four straight months of falling or stagnant prices. Interestingly, the jump in producer food prices was strictly at the finished goods stage. Crude food prices changed -0.8% in October, and intermediate food prices -1.9%. According to the Commodity Research Bureau, raw foodstuffs prices were -2.1% in October, and since April -11.7%. So all that money producers are paying for food is not for the actual food part. Finished food goods inflation is most likely simply another manifestation of high energy prices.

Core PPI on finished goods was up 0.3%, the second month in a row at that level. Seasonally adjusted, core producer price inflation is only running at 1.7%, however, and over the last three months the annualized rate is but 2.1%. With oil prices falling precipitously over the past three weeks, these big numbers are surely a one-off phenomenon.

We get the consumer price data tomorrow, and economists are surely scrambling now to revise their predictions upwards. What amazes the General is that the consumer seems not to have missed a step in the face of these price hikes. We'll know more on Wednesday, of course, but these numbers suggest that as long as Americans have a dollar in their pocket, they will spend it. Prices don't matter.

What happens, however, when John and Jane Public don't have a dollar to spend? That day may soon be upon us. Remember that in September 2004 the personal savings rate dropped to 0.2%. Over the first nine months of the year the personal savings rate is running at a mere 0.9% -- as I've said before, the lowest savings rate since the depths of the Great Depression. Strong demand continues, but only thanks to the complete elimination of saving from American consumer habits.

When there is no more money to spend, then what? Yes, you know the answer already. Borrow!

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