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.
We have presented the PPI on a regular basis. In December The Producer Price Index for finished goods increased 0.4 percent, the index for intermediate goods rose 0.6 percent, and the crude goods index rose 2.4 percent. This suggests that inflation is still very tame considering that the price for crude goods was down 2.6 percent in November.
About half of the increase in finished goods prices was due to higher energy costs which climbed 1.6 percent in December. This was the largest advance since a 2.5-percent jump in June 2013. Gasoline prices were up 2.2 percent, and home heating oil prices were up 6.4 percent. This follows a 3.0 percent increase in energy prices in the prior month. Without the decline in energy prices, the PPI would have increased.
Outside of certain metals – particularly iron and steel scrap – the price of crude inputs have not risen much over the past few months. Most of these products are imported, and the price of imports has been kept in line due to the weak world economy. As long as economic problems in other large economies such as Europe and Japan keep the value of the dollar from falling dramatically, crude goods prices should continue to be soft, while continued productivity growth in America will keep prices for intermediate and finished goods in line.
That said, we continue to worry about the extremely loose monetary policies being conducted by the Fed – particularly since they are having little impact on the overall economy other than bubbling asset markets. It is possible that another bubble is occurring in the US equities market and investors may want to be wary of new record highs for these indexes. In addition, inflation can turn on a dime, and with extremely low interest rates and the availability of cheap capital, now is still an excellent time for investors to purchase hard assets – particularly those for which there are productive uses. These low rates cannot continue forever, and even small shifts may lead to rapidly increasing interest rates for smaller and even medium sized firms.
Subscribe to the Monthly Manifesto
Why subscribe to the JDA Monthly Manifesto?
This monthly economic newsletter is one way John Dunham & Associates assists clients and friends to better communicate and manage issues using sound economic and fiscal research — what we call Guerrilla Economics.
For more information on how we can help on your legislative issues, please contact us at 212-239-2105.