The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Why Investors Care
| Released on 2/26/08 For Jan 2008 | |||||||||||||||||||||||||
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Highlights
Overall producer price inflation surged in January while the core rate also firmed, providing a somber background for Fed Chairman Bernanke's Congressional testimony the next two days. The overall PPI jumped a monthly 1.0 percent in January, following a 0.3 percent dip in December. The January boost came in sharply above the consensus forecast for a 0.3 percent boost in the overall PPI. The core rate inflation increased to a 0.4 percent, following a 0.2 percent rise in December. The core rate for January exceeded the consensus expectation for a 0.2 percent increase in the core rate. Today's hot PPI numbers and the latest CPI data clearly portray the near-term possibility of stagflation. The Fed increasingly is having to choose between staving off a possible recession and bringing inflation down and the decision is only getting more difficult. With the economy still on the soft side, higher producer prices may bode ill for retailer profits as much as for nudging up inflation. Businesses may only be able to pass along part of the increased costs.
The year-on-year rate for the overall PPI soared to up 7.7 percent in January (seasonally adjusted) from up 6.5 percent in December. This is the highest rate since 7.9 percent seen in September 1981. The year-on-year core rate increased to up 2.4 percent in January from up 2.1 percent in December. This is the highest rate for the core since 2.5 percent seen in September 2005.
For the overall PPI, the January spike was led by the energy component, which posted a 1.5 percent gain, following a 3.0 percent dip in December. Inflation reversed in January for both by passenger cars and light trucks which rose 0.3 percent each and added to both headline and core inflation. Also showing strength was pharmaceuticals, which jumped 1.5 percent, following a 0.4 percent rise in December.
Overall prices at the crude level surged 2.5 percent in January, following a 1.1 percent boost in December. Excluding food and energy, crude prices in January still jumped 4.0, following a 0.2 percent rise the prior month. At the intermediate level in January, prices rose 1.4 percent, following a 0.2 percent decline in December. Excluding food and energy, intermediate prices advanced 0.8 percent after no change in December.
Today's PPI report clearly is worrisome for the Fed. While the Fed is counting on a soft economy to help ease inflation, the current pace of inflation certainly is much higher than the Fed expected just a few months ago. This likely limits how far the Fed can cut rates further and boosts the odds that the Fed will have to unwind some of the cuts not far down the road. On today's release, interest rates rose while the dollar declined.
The producer price index slipped 0.1 percent in December, following a 3.2 percent surge in November. We also got good news last month on the core rate which moderated to a 0.2 percent increase, following a 0.4 percent jump in November. The headline number got some help from the energy component, passenger cars, and light trucks-all of which declined. But more recently energy costs have been rising and the trend for both headline and core PPI inflation is up. The year-on-year rate for the overall PPI is still quite steep, coming in at up 6.8 percent in December with the core rate also on the high side at up 2.1 percent.
PPI Consensus Forecast for January 08: +0.3 percent
Range: 0.0 to +1.1 percent
PPI ex food & energy Consensus Forecast for January 08: +0.2 percent
Range: 0.0 to +0.5 percent
![[Chart]](chart.gif)
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It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations. |
![[Chart]](chart_1.gif)
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Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI. |
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