Tuesday, June 14, 2005

INFLATION, SHMINFLATION

If you want to find inflation, look to housing. You won't find it in consumer goods and services, where PCE inflation is running at a tepid 2.7% and core PCE inflation at a downright cool 1.6%. And as the BLS tells us this morning, you won't find it at the producer level, either.
The Producer Price Index for Finished Goods fell 0.6 percent in May, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decline followed a 0.6-percent increase in April and a 0.7-percent advance in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.7 percent in May, after rising 0.8 percent in the preceding month, while the crude goods index moved down 2.0 percent, following a 2.7-percent jump in April.
Finished goods inflation has fallen from 5.0% in November 2004 to just 3.5% now in May. Intermediate goods inflation is down from 9.9% in November to 6.3% in May, and volatile crude goods inflation has plummeted from 25.2% in November to a mere shadow of its former self at 6.1%.

The story is especially interesting when you simply remove energy goods. Non-energy finished goods inflation stands in May at just 2.2%; non-energy intermediate goods inflation is at 4.6%; and non-energy crude goods are actually back in deflationary mode, with an annual price change of -4.1%.

The tie-ins to the housing market are interesting as well. Prices on softwood lumber have plunged, -10.8% from May 2004. Prices on hardwood lumber are down as well, -1.7% y-o-y. Plywood prices are vanishing before our eyes, -22.3% since this time last year, and millwork prices up just 2.4%.

The prices of stuff to put in your new house are staying tame as well. Wholesale furniture prices are up 3.6% (although retail furniture and bedding is actually -0.6%) and floor coverings prices are up 8.2% (although up a much tamer 2.0% at the retail level), but home appliances are up only 1.6%, lawn and garden equipment up just 0.7%, and home electronics prices continue to fall, -3.5% since May 2004.

So it appears the PPI report offers lots more fuel for the housing fire: less pressure for interest rate hikes past June; cheaper wood for construction; low inflation on things to stuff all thoses new (and newly bought) houses with.

The May CPI report comes out tomorrow. Look for more disinflation there as well, especially in light of the weak May retail sales report. We may even begin creeping back to the days of late 2003 when "deflation" was on everybody's lips.

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