Producer Prices Continue Ascent

Once again into the fray of inflation ex-inflation:  

Yesterday’s PPI data was not at all a net positive, despite the initial headline, and the initial reaction of bonds and stocks.

Energy prices got the blame, as if that’s any surprise. If I told you a year ago that $58 Oil would be a relief to the market, you would have told me I was high on petroleum distillate fumes.

Retail sales data was also improved. I wonder why they don’t report THAT data point ex-food and energy.

Perhaps its because of the sub-sector "Non-Store Retailers;"  It was up +1.2% (versus prior  +0.1%). What’s in this category, you ask?  Lots of odd stuff, but the one item that stuck out like a sore thumb was this:

“Establishments engaged in the direct sale of products such as home heating oil dealers . . . are included in this sub-sector.

So we take out energy so as to not show inflation, but we keep it in to show good retail sales. Note that the same sleight of hand is performed by some pundits regarding S&P500 earnings. (At least their hypocrisy is consistent).

The quandry for manufactures with producer prices is what to do with
the cost increase: Pass it along, and risk losing some sales — or, eat
it, hurt margins, and risk profits.

This risk to P/E is is why accurate and consistent data reporting is so important for investors to understand.

Here’s the WSJ’S take:

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"Higher natural-gas and electricity prices pushed up wholesale
inflation last month, while falling gasoline prices and lower demand for new
cars obscured an otherwise strong month for the nation’s retailers.

The Labor Department said Tuesday its producer price index for
finished goods rose 0.7% on a seasonally adjusted basis after a 1.9% increase in
September. But the "core" producer price index, which excludes volatile food and
energy prices, fell 0.3% after a 0.3% rise in September. That was the biggest
monthly drop since April 2003, when the core price index fell 0.5%.

Prices for goods in the production pipeline rose. Semi-processed
good prices rose 3%, higher than September’s 2.5% increase, in the biggest
one-month gain since August 1974. Raw materials costs rose 6.7% in October, down
from 10.2% growth in September.

"Consumer confidence is fading and it is expensive to simply
drive to the mall, but that has not stopped households from partaking in their
favorite pastime: Shopping," economist Joel L. Naroff of Naroff Economic
Advisors wrote in a note to clients."

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Bottom line: 
Inflation remains robust, there is some limited ability to pass price increases along, the consumer continues to spend regardless of debt and energy prices.

For more on this, see Doug Kass’ Consumers: Shopping ‘Til They Drop.

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UPDATE:  November 16, 2005  4:42PM

Joanie is even more skeptical than I:

"Look at the Intermediate prices because that’s where you’re supposed to look to gauge what kind of pricing pressures are in the pipeline. Intermediate goods prices were +3.0%, reflective of a 9.3% increase in energy prices.

And if you want to look further down the road, Crude goods prices overall were +6.7% for a +31.5% y/y zinger.  Natural Gas?  How about +20.3% in October following +30.5% the prior month?

Of course, you, as analyst of the data, can back that out if you want. But the Producer can’t . . . Back this out."

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Sources:
Wholesale Prices Rose 0.7% Despite Drop in ‘Core’ Costs
Autos, Gasoline Dented Retail Sales, But Demand Elsewhere Looks Robust
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
November 15, 2005 9:56 a.m.
http://online.wsj.com/article/SB113205959136497513.html

Consumers: Shopping ‘Til They Drop
Doug Kass
Street Insight Contributor , 11/15/2005 1:22 PM EST
http://www.thestreet.com/i/_tschpii/streetinsight/promosi/10252987.html