The Producer Price Index is one of two key market pricing series put out by the Bureau of Labor Statistics on a monthly basis. It is one of the oldest continuous data series collected by the Federal government, having begun in the 1890s. It consists of a weighted index of prices measured at the wholesale and production levels. The BLS releases an index for commodities (for example energy, natural gas, scrap metals), intermediate goods (like fuel, lumber, steel bar), and for finished goods. The PPI serves as a good indicator of medium term inflation prospects. It is not measuring consumer prices, and many producer prices are locked into longer term contracts. As such, it measures spot prices better than actual consumer inflation.
The Producer Price Index for finished goods fell slightly in November (down 0.1 percent), the index for intermediate goods fell 0.5 percent, and the crude goods index dropped a substantial 2.6 percent. This suggests that inflation is still tame, but November’s decline was led by the index for crude energy materials, which dropped a staggering 6.6 percent. Lower prices for crude foodstuffs and feedstuffs also contributed to the decrease, declining 0.3 percent. By contrast, the index for crude nonfood materials less energy advanced 1.4 percent. This all suggests that the reasons for tame inflation are due to market factors rather than overall economic conditions. Petroleum production has ramped up significantly in both the United States and across the world, keeping prices in check. In addition, crude food prices bubbled in 2012 – with corn prices heading to all-time highs. The bursting of this bubble in 2013 has helped keep food prices in check, although there have been solid increases in food prices at the grocery stores as the higher contract prices from 2012 push their way through the system.
Looking across categories, while overall food costs are up a tame 0.6 percent over the prior year, some categories like fresh vegetables and meats are up substantially with vegetable prices up 34 percent on the year. Both pharmaceutical and tobacco costs are also up substantially on a year over year basis. Outside of wood and paper products most intermediate goods costs are down on a year over year basis. Lumber prices are up 12.8 percent (soft woods) and 20.8 percent (hard woods) respectively. Crude materials prices are down 3.3 percent on the year driven by lower food prices (off 5.8 percent) and metals prices. Even though iron ore prices are off 25 percent, ferrous scrap prices are rising. This reflects a change in technology in the steel producing industry, where integrated mills that use ore are being replaced by mini-mills fed by scrap.
We continue to be surprised by the softness in crude materials prices since the softness in the dollar should be reflected on world markets. Perhaps production ramp-ups to meet demand in China are now coming on line – at the same time as production in Chinese factories is tapering off. We will continue to watch the PPI closely for new signs of inflation, but without a rapid spike in crude materials costs, it appears unlikely that inflation above the 3-4 percent range is at all likely in the near term.
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