Producer Prices & Inflation

Tales of Inflation’s demise have been greatly exaggerated.

Core_ppiPPI — the prices for finished goods, not raw materials — leapt 2% in
November, the greatest gains in 32 years (November 1974). Core PPI
excluding food and energy swelled 1.3% — highest since July 1980, erased the 0.9% drop last month.

The numbers were significantly above Wall Street median forecast 0.7% month-on-month increase (0.3% core rise).

Bloomberg reported:

"The producer price index climbed 2 percent in November from
a month earlier, led by higher costs of energy and light trucks,
the Labor Department said today in Washington. Housing starts
rose at an annual rate of 1.588 million last month, more than
forecast and 6.7 percent higher than in October, the Commerce
Department said. Building permits declined.         

Six months of slowing economic growth haven’t defeated
inflation, the wholesale price report indicates. Fed Chairman
Ben S. Bernanke has predicted a pickup in the expansion,
suggesting that policy makers are reluctant to reduce rates in
coming months."

Let’s all agree to the following: Regardless of which set of numbers you choose to believe or disbelieve, our personal experience is that inflation continues to exist, although it may be moderating somewhat. I will admit that the November PPI overstates inflation — I sincerely doubt prices are rising at an annual rate of 24% — if you care to admit that 0.0% is just as nonsensical.

Ppi_monthly_percent_changeFor the rolling 12 month period ending in November, wholesale prices rose
0.9%. Sicne energy prices collapsed follwoing the changes inthe GSCI, inflation has been below levles seen in the spring and summer. Year over year, core PPI was up 1.8%.

How did the numbes break down? WSJ reports:

"Tuesday’s report showed producer prices for energy
increased 6.1% last month compared to October. Gasoline rose 17.9%, the
highest monthly rate since June 2000. Gas prices had fallen sharply the
previous two months. Residential natural gas increased 5.9% last month.
Food prices increased 0.1%.

Wholesale prices of passenger cars increased 2.2%,
while wholesale light truck prices soared a record 13.7%. Car and light
truck prices had tumbled in October due in part to new quality
adjustment measures incorporated by government statisticians. Capital
equipment prices rose 1.4% last month.

Deeper in the production pipeline, price pressures
remained generally elevated. Prices of raw materials, known as crude
goods, rose by 15.7%, while excluding food and energy they rose 0.5%.
Intermediate goods prices rose 0.7%, but were down 0.3% excluding food
and energy."

Market sold off in reaction to the data, with the Dow and SPX holding up fairly well (off less than 0.2%), while the Transports were down ~1.0%, and the Nadaq 100 was lower by 0.85% (if that’s what defines your reality).

Bottom line: Inflation is nowhere near as nonexistent as the Markets were believing on Friday. That CPI data was a goof.

If I can, I’ll follow up on Home Permits, Construction and Sentiment today or tomorrow, all of which belies the "Real Estate is bottoming" crap you may have heard from the Usual Suspects.




Producer Price Indexes
Finished goods: +2.0%(p) in Nov 2006;
Finished core: History  +1.3%(p) in Nov 2006
Bureau of Labor Statistics December 19, 2006

U.S. Economy: Producer Prices Soar
Shobhana Chandra and Robert Willis
Bloomberg, Dec. 19 2006

Producer Prices Climbed in November, Suggesting Inflation Pressures Linger
WSJ, December 19, 2006 9:31 a.m.

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. BDG123 commented on Dec 19

    It was all energy. That was all that was driving the number. Most everything else was below 2%. That will crater when demand craters. So, it isn’t sustainable.

    BUT, the way inflation is calculated is hilarious. YOY is a f’n joke. So, if prices increase 20% one year and 1% the next year, inflation is contained. DOH! I simply don’t fight it. Inflation is dead.

    If they really wanted to measure inflation it wouldn’t be a relative number. It would be an absolute number. In other words, if milk cost $1 and next year it cost $2 and the following year it cost $2.01, inflation would still be one hell of a problem.

    But, who cares. No one else does. And, neither does the markets.

  2. scorpio commented on Dec 19

    recent talking heads have noted that reason market is up, volatility down and credit spreads historically low to nonexistent is: fewer recessionary months in last 20 years than in previous post-war periods. but if inlation is actually higher than indicated (using Williams’ shadow number of 5-7% for example using pre-1980 methodologies for computing inflation) then we’ve actually spent many more months in recession to slow growth than publicly acknowledged. at some point, probly soon, this will all be cleared up

  3. Andy commented on Dec 19

    Does Firefox have a picture straightner too?

  4. M.Z. Forrest commented on Dec 19

    Given the percipitous drop in the dollar, one would expect an increase in the price of oil. Presently China is not demanding greater $s for finished goods. China buys oil like everyone else and does some importing of other goods, particularly raw materials. How far the crack spread between Chinese costs and revenues can close before China demands more dollars is the big question. (This can be extrapolated to the whole Far East.) My guess is that China can further shrink its margins before they start raising prices. Russia seems to be the cog in the wheel. Russia wants to reduce inflation, but they don’t want Rubbles being stored overseas. As one of the largest suppliers to Europe of natural resources, this is putting pressure on the ECB to have a stronger monetary policy. Consequently, BB is under pressure from the ECB. What a wonderful circle!

  5. BDG123 commented on Dec 19

    Seems like you’ve attracted some bright new talent. And, you have a new name: Beary. That’s awfully close to my name. Maybe we are brothers separated at birth.

  6. Sam Park commented on Dec 19

    Those energy spikes in the PPI report look funky. Crude oil prices and gas prices crept up in November, according to EIA figures. However, I don’t recall world crude prices jumping double digit in November.

  7. Sam Park commented on Dec 19

    Here’s the thing… we can pretty much buy oil with US dollars. So it doesn’t really matter what the dollar does in the exchange market. Plus, we get most of our oil from Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria.

    There will be problems if the oil-standard goes away from the dollar. That’s what Iraq did… and now what Iran is trying to do. It’d be bad for us if we go from the petro-dollar to a petro-euro.

  8. Estragon commented on Dec 19

    Sam Park – just guessing, but the PPI would be input prices for commercial producers. Those prices may not be spot prices, but may have been futures prices locked in some months ago.

  9. Sam Park commented on Dec 19

    Yeah… they’re not spot prices. PPI numbers are surveyed figures. However, there is a high correlation on price movements between spot prices and PPI fuel related index, but the percent changes aren’t exactly the same.

    Whatever the case, I’m still confused about the difference between the spot price and the PPI crude fuel index in Nov. The high double digit monthly percent change for crude fuel (73%!!!) that was reported in the PPI seems like an anomaly when considering spot price for crude oil rose only less than 2% (Brent prices) from Oct to Nov.

  10. Tom commented on Dec 19

    The blogger must wake up every morning and say to himself, what data points came out today and how can I find some contrary data to prove them wrong. I am not interested in that – I want to know correct data, to a point. I think the blogger can spend time more wisely giving advice since his occupation is not to argue over data points but to decide how to use those data points to make money – such advice is really what is interesting – not the underlying data. Of course you can argue that you still need correct data but let’s use proportion here and spend less time on data analysis for sake of data analysis and more on how data analysis can be used to make money!!! – my opinion on how to make the blog into something better and more worthwhile.

  11. muckdog commented on Dec 19

    Barry, did you put in a market order for 1,000,000 light trucks last month?

    So the CPI comes out last week and says there’s no inflation. The PPI comes out today and says that we have high inflation. I guess we have to call it a draw. Both sides have some stats to back ’em up!

  12. deltaverde commented on Dec 19

    Weren’t last month’s inflation numbers unexpectedly low – again due to the price of light trucks? Who knew that one market sub-section had so much sway over the countries gross economic performance. I feel like Alice.

  13. Tom commented on Dec 19

    I am adding to my earlier post and now I know why Barry will not give us his opinions – he wants us to buy his newsletter. Here is a direct quote from his ad:
    “We have a decidedly different approach than other newsletters you might be familiar with. Most research firms that specialize in economic analysis and market/investment research get lost in a sea of data. They spend too much time obsessing about this data point or that economic release so that they lose sight of the big picture.”

    What a pity – most of the blog posts do what he warns against – spending too mcuh time playing with data and not delivering to blog readers – “The Big Picture.”

    I guess I come here repeatedly expecting to finds something useful for investment decisions and all I get is how the headline data is wrong so there is no alternative to find what is right – now all I have is uncertainty and being uncertain does not lead to taking action – I know big media is mostly wrong but I think they get the big picture right even if you look closely at the picture you seel the pixelation and misqued data points.

  14. advsys commented on Dec 19

    Is anyone else getting really tired of all the noise that gets generated every time the Govt publishes another piece of data. We all are starting to realize that we can’t rely on Govt data anymore. Not everyone has yet but most of us.

    So, if you really need to know if prices are going up then take the checkbook from an average family of 4 living in the midwest or the south somewheres.

    I think we all know that if you analyze the cost of housing, heating bills, medical coverage, FOOD, and most likely even clothing it has gone up. There is no way it has not. Since these items will cover at least 80% of the families budget we now know that prices are rising. So, now you know what the CPI, PPI, and any other I’s you have should be saying.

    Now what do you want to do about it. Are you for long term sustained economic growth or not. If you are, it seems to me that the only question that matters is the debt load that we are currently carrying and continuing to incur.

    I would be most fascinated by any discussions that revolve around debt. I can even start it off if you want. Answer this. Is a tax cut a tax break or debt if there is no corresponding reduction in expenses to go along with the loss of this revenue?

  15. scorpio commented on Dec 19

    what is the Fed so afraid of, that every time the market looks like it’s going to take a little breather and give back a few points, they have to trot out a governor to remind everyone of the Goldilocks soft-landing scenario (today’s being Fisher). pathetic

  16. Eclectic commented on Dec 19

    Y’all are all chasin’ in-fla-tion like a coon dog chasin’ a coon at night.

    Did you know a coon will drown a dog that’s foolish enough to follow him into the water?

  17. Gary commented on Dec 19

    The Fed can print a lot of money prior to the elections but they can’t keep that money from eventually finding it’s way into commodities. I’ve said it before and I’ll say it again, there’s no free lunch in this world. The printing presses aren’t going to keep the world from feeling the pain of the bursting of the stock market bubble forever. For every action there’s a reaction. The Fed is going to have to learn about inflation all over again because politicians wanted to get reelected.

  18. Sam Park commented on Dec 19

    Oh duh… the culprit was Natural Gas. Yeah, Natural Gas prices almost doubled from mid-Oct to mid-Nov. Since Nat Gas has a relatively big weighting-factor on the PPI, that would explain the jump.

    What can I say… it was just gas.

  19. dave commented on Dec 19

    what difference does it make what the number is? PPI was down 1.6% last month and the markets closed higher. PPI is up 2.0% this month and magicbid pushes them all green except the NASDAQ.

    Maybe they’re just throwing these numbers out there so the PPT can get some excersise.

  20. Bill King commented on Dec 19

    The 2% surge in PPI for November is the largest increase in 30 years. Core jumped 1.3%. But these numbers are bogus. They are the product of the absurd understating of small truck prices over the past few months.

    Please recall that we and a few others noted that the government economic statisticians engineered unwarranted price reductions [hedonics] in small truck prices that served to overstate GDP and understate the GDP deflator (before the election?). It appears that in November, a reckoning materialized.

    In the November PPI light truck prices increased 13.7% and passenger car prices increased 2.2%.

    Our Monday missive noted that November CPI had gasoline prices down 1.6% though another US government agency (EIA) had them at a gain. We also noted, citing John William’s work, that gasoline service station sales increased a ‘substantial’ amount, which suggests higher prices.

    For the November PPI gasoline surged 17.9%. And we’re to believe that in the CPI ovember gasoline prices declined 1.6%!?! Preposterous! Ya think the oil companies are eating the difference?!?!

    The November CPI and PPI further validate the notion that US government economic statistics are convoluted and compel more people to that view. Good seats are still available on our ‘government economic stats are bogus’ bandwagon but the supply is dwindling.

  21. Eclectic commented on Dec 20

    Bill King, I think you’re right.

    It would seem that when the figures were announced that most people, instead of wettin’ their pants over in-fla-tion, would’ve figured out that the figures jiss don’t figure.

  22. Eclectic commented on Dec 20


    Here’s a very timely book you may enjoy reading:

    The author is Charles Fishman.

    Actually, I’ve just finished the audio book version that’s narrated by Alan Sklar. I could listen to Sklar’s sonorous bass voice if he just read the phone book, so that makes it almost as entertaining as it is informative.

    This is not an investment recommendation for or against Wal-Mart, as I am sure that most people have their own opinions.

    However, I list the book as punctuation for a statement I’ve made here before:

    “The real objective of all human economic endeavor, even if only understood subconsciously, is the marginal reduction of the costs of goods and services philosophically toward zero.”

  23. my1ambition commented on Dec 20

    btw, do Humvees in Iraq count as light-trucks??

    Ben Bernanke has said himself that he checks gold prices daily. Gold, which usually stands as an inflationary hedge has been creating a very substantial bottom, similar to that of mid-05, early 06, and now the end of 06.

    Gold has been saying for over 5 years now, that inflation is definitely a problem.

  24. blam commented on Dec 20

    Eventually rigged markets create so much confusion that uncertainty of market direction is maximized. The under-lying (pun intended) trend of this market is uncertain.

    Loss of momentum but still under the control of wall street with backing from the government ? Short term whipsaw – followed by ? January looms large.

  25. Barry Ritholtz commented on Dec 21

    I get 100s of comments a day: half are spam.

    Of the remaining 100-50 or so posts, we cull anyone who is disrespectful, who misquotes me, is obnoxious, posts bad dope, or is a blind hypster. My assistant deletes dozens of crap comments a day.

    In your case, you not only misquoted Rutledge (it was Kudlow said that about Retail, not CPI) you actually ignored the specific language of my post:

    “Let’s all agree to the following: Regardless of which set of numbers you choose to believe or disbelieve, our personal experience is that inflation continues to exist, although it may be moderating somewhat. I will admit that the November PPI overstates inflation — I sincerely doubt prices are rising at an annual rate of 24% — if you care to admit that 0.0% is just as nonsensical.”

    To be blunt, I don’t have the time to correct every misstatement made in comments — but yours was so blatant, Kathy flagged it and banned you — feel free to convince me you should be unbanned.

    TBP is not a democracy, its my lounge/den/office. Posting comments is a privilege.
    When people write what they want, regardless of the facts, they lose those posting priviliges here.

    I want people who will contribute to TBP community — 20-30,000 people per day come here — and not waste my time

  26. A Dash of Insight commented on May 7

    Cognitive Bias of Pundits: A Challenge for Barry

    A Dash of Insight is a blog about a book. We are writing Misguided Gloom one page at a time. One of the themes is that prominent market pundits, despite their familiarity with behavioral finance, are subject to the same

Posted Under