Producer Prices: Tame, or Not?

0.1%  PPI ?

Not according to the BLS year over year data:

"From October 2006 to October 2007, finished goods prices advanced 6.1 percent.  Over the same period, the index for finished energy goods climbed 16.6 percent, prices for finished consumer foods rose 7.1 percent, and the index for finished goods other than foods and energy increased 2.5 percent.  At the earlier stages of processing, prices received by intermediate goods producers advanced 5.6 percent, while the crude goods index jumped 25.7 percent for the 12 months ended in October."

Perhaps its just me, but I fail to see how that can be considered benign inflation data.

The annual comparison doesn’t have any seasonal adjustments; Its merely where prices are today versus 12 months ago.

Finished goods prices +6.1%; Energy goods +16.6%; finished consumer foods +7.1%; finished goods ex-foods and energy +2.5%.

Note the typical headline:

Wholesale Prices Rise Slightly

The producer price index for finished goods rose 0.1%
in October, the Labor Department said Tuesday, following September’s
1.1% increase. The core index, which excludes food and energy, was
unchanged after rising 0.1% in September.

Wall Street had expected a 0.2% gain in both the headline and core figures, according to a Dow Jones Newswires survey.

Even the monthly figures are a result of a little sleight of hand: 

Peter Boockvar wrotes:

"Implied inflation expectations in the 10 yr TIPS after the reported benign PPI is unchanged with yesterday’s close because of the expected reversal upward in gasoline prices in Nov and also the apparent impact that a 2.7% drop in truck prices had on the # as it was the biggest one month drop since Oct ’06. Market News is reporting that the unadjusted overall PPI rose .7%, "so most of the ‘good behavior’ of inflation this month merely stems from seasonal adjustment factors." (emphasis added)

Astounding . . .





Producer Price Indexes – October 2007

Wholesale Prices Register Modest Increase

WSJ, November 14, 2007 9:14 a.m.

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What's been said:

Discussions found on the web:
  1. Guy M. Lerner commented on Nov 14

    It is all slight of hand….anyway CPI will likely suffer the same fate; year over year will probably put the inflation rate north of 3.7% as last year’s numbers during the next 3 months are very low…..month to month change only has to be “slight” and I am sure it will be but the trend is there for all to see

  2. XON commented on Nov 14

    It’s interesting from the macro-psychology angle to ask if, over decades, as the core/ppi divide has emerged, that markets and industries seem to have allocated resources away from core industries into industries that are non-core.

    While I realize that farming and durable goods are by no means undercapitalized, the widening divide between core and ppi suggests that if I’m feeling entrepeneurial, there would be a preference towards and industry not under the implicit scrutiny of the basket that makes up the core measurement.

    Am I up too late in the night?

  3. lewis commented on Nov 14

    But the good news is that the Fed’s Fisher has been reading your blog……

    Fisher said that food prices and energy prices seem to be driven by higher demand in booming economies such as China and India. This is unlikely to shift, he suggested.
    “The Fed now routinely strips out volatile food and energy prices from its favorite inflation readings. Fisher suggested that this may no longer be such a good idea.
    When we pay more for food and energy, it may no longer represent mere noise but might be providing signals of longer-term, structural inflationary pressures,” he said.

    I love the last quote, sort of like the guy in the burning building noting it may not just be a seasonal change……

    Next news quote I want to see is this one on CNN
    “Worldwide inflation yet to affect US”


  4. dblwyo commented on Nov 14

    That’s the right metric to focus on – picture is clearer, noise is reduced and adjustment factors shenanigans disappear. Just as a little exercise try annualizing it:
    (1+.01)^12 – 1 = 1.13-1 = .13 or 13%. OUCH.

    I’ll take the YoY number, thank you very much.

    The other teensy, tiny little problem is that the PPI vs CPI gap is starting to go away as companies are increasingly passing on their increased supply costs to consumers; a move they have no choice over.

  5. super-anon commented on Nov 14

    It still seems to me that the only time prices rise is when they’re being blasted by easy money from the Fed through speculative channels, ala oil recently and houses over the past few years.

    This, IMO, is indicative of inflation from credit expansion vs. the kind of wage/price inflation we had in the 70s (or what we’re seeing in China today).

    It’s why I maintain the inflation will fall off as soon as the borrowing binge stops and the easy credit stops being jammed into the economy.

    We’re starting to see segmented deflation in any area where we have siginficant “credit blackouts”.

  6. Michael Donnelly commented on Nov 14

    Food and energy inflation is still in full force.

    Finished consumer foods were up 10% last month and this month are up 12%. Compared to this time last year food price are up 7.1%. And what about energy? Up 16.6%.

    Knowing how much the dollar cost of these items has risen helps make sense of today’s retail sales report. Actual dollar sales reported today were up 0.2% and all of the gains were in sectors where inflation is raging.

    Food services +0.7%
    Grocery stores +0.6%
    Gasoline stations +0.8%
    Auto accessories: tires, oil, and other parts +1.5%
    (tires, oil and other lubricants are all significantly oil and energy based)

    MAJOR REVISION NOTE: Unrevised Retail Sales fell 0.1%

    The prior months data were lowered so much that the old value for September retail sales $342.466 (billion) was higher than the new October retail sales value of $342.120. Without past revisions, retail sales fell by -0.1% in October.

    How does that retail sales number feel now?

  7. tb commented on Nov 14

    truck prices down 2.7% y-o-y

    wall street journal online price to drop by 100%

    computer prices dropping like a stone (see Walmarts $199 PC)

    house prices falling

    US equities one of the worst performing in the world over the last year or three.

    iPhone went from $600 to $400 after just a few months.

    Long treasuries at the lowest-yield in a long time (the market knows best…)

    Smells like deflation to me. Just need Oil to drop substantially (i reckon the Saudi’s still pull it out the ground for 10 bucks a barrel, so could drop a LONG way), then wait for more supply next year to take food prices down (as more crops get planted on back of high prices).

    Low growth, diminished access to credit, falling household wealth due to property crash, all leads to deflation and reduced prices.

  8. super-anon commented on Nov 14

    Fisher said that food prices and energy prices seem to be driven by higher demand in booming economies such as China and India. This is unlikely to shift, he suggested.

    Is that really inflation, or is it just food getting more expensive?

    If there’s not enough oranges can the Fed raise rates to make more? How about more oil?

    I like to use the definition that inflation is the money supply growing faster than real output. In other words, price increases due to justifiable supply/demand imbalances aren’t considered because they can’t really be addressed by monetary policy.

  9. robster commented on Nov 14

    What was inflation in China last month? And was that core or non-core?? Those numbers make inflation in the US look positively benign. India and China, especially, are growing too quickly.

    There’s no way that the 1bn person chinese economy can accomplish standards of living in 15 or 20 years equivalent to western standards built over 50 or 100 years without slamming into global resource bottlenecks and pushing up prices everywhere.

  10. s commented on Nov 14

    This gores to the heart of the headline vs core argument by Fed speech. ignore it longg enough and you eventually have favorable compaarisons. By understationg they overstate growth and thus the splendid goldilockls GDP numbers. The problem is worse than deflation!

    This deflation equation is niot shocking. it is the INFLATION in everything imaginable that is set to boomerang and hence the price cuts in all this discretionary goods. The wrench in such thinking is the global boom scenario if belived. There is no reason to belive that china is here to stay as is india. Therefore, the core goods are all set to stay expensive hence no mean reversion.

    All this adds up to standard of living erosion in the US, no matter what the Fed prints or the Gov’t buys. both institutions are as illiquid as the consumer. That GDP number is artifically high and will see a very large contraction as this plays out.

  11. s commented on Nov 14

    call it the logical extension of offshoring

  12. Engineeringthecrash commented on Nov 14

    Hear no inflation, see no inflation, speak no inflation.

    Just don’t look down.

  13. jg commented on Nov 14

    Thanks for the post, Barry. Spot-on you are, and you are doing the public a service by bringing the hocus-pocus antics to light.

    Terrible, that finished goods, intermediate goods, and raw materials are leaping up in price year-over-year, with nary a whimper from the press.

  14. Winston Munn commented on Nov 14

    Are we missing the point of the PPI numbers? PPI emphasizes finished goods prices, meaning that tame PPI indicates that producers are unwilling or unable to pass on raw material price increases – which leads to a squeeze on margins.

    With retail coming in at 0.2% and core PPI coming in tame, it would look to me that earnings will be impacted – add in the growth of inventories, and you have all the makings for production slowdowns.

    Recession anyone?

  15. Stuart commented on Nov 14

    Big brother doesn’t want you to know real inflationary pressures. They need to keep inflationary expectations suppressed in order to keep cutting rates or the cat gets let loose out of the bag. How else could they sell long dated maturities at these ridiculously low yields. My beef is that the kool aid drinking mainstream media plays along like thoughtless lemmings blindly reporting verbatim “official” figures as if they are beyond reproach. Whatever happened to objective journalism and critical analysis to perhaps, here’s a strange thought, kick the tires and test whether what’s reported jives with ones’ experiences. More and more, comments uttered on blogs such as these highlight the growing gap between daily experiences and these official figures. Yet they’re official, so who are we to challenge them..sarcasm. Frustration over this reality gap is stoked as the reporting media’s independence and objectivity has been forfeited for paid “shillism”, now at the utter servitude of the paying advertiser.

  16. Bill B commented on Nov 14

    “How else could they sell long dated maturities at these ridiculously low yields.”

    We have stupid Chinese and Japanese central bankers to rely on. They could get worse yields if they try to invest domestically.

  17. ron commented on Nov 14

    You have no clue Barry! You expect the Central bank to raise rates during the largest liquidity contraction since the great depression. You expect them to come out and admit that we have a economic crisis, if they actually got up and told the truth the country would implode into bank runs and general hysteria. The FED understands that we have commodity price inflation but knows better than anyone that we have significant deflation in the money supply, so expect the FED to continue to lower interest rates probably to zero, similiar to Japan.


    BR: Ron, all I want to do is look at the data and interpret is honestly and faithfully.

    I don’t care what the repercussions of the Truth are. I don’t give a flying fuck at a rolling donut what the Fed’s political concerns may be. I just want to know what is happening in reality — not in the artificial world of mark to models, or political spin or any other bullshit.

    Since when did reality become such a subversive topic?

  18. John T commented on Nov 14

    come on! play along

  19. TKL commented on Nov 14

    BR, you’ve been pounding the table about inflation. But you need to explain why long-term bond yields are so low. It is impossible to take the inflation threat seriously as long as the 10-year is at 4.28%. Is the bond market rigged by the government too? What say ye?

  20. michael schumacher commented on Nov 14

    The BLS is it’s infinite wisdom had the BALLS to report that gas prices fell by an avg. of 3.1%…….

    I also see that the same prices at the pump rose by an avg. of 5.1%

    Where in the Eff do they get this stuff??…and no one questions it. If they worked for me they would have been fired for incompetence ages ago……

    As long as the system gets it’s bonus’


  21. SINGER commented on Nov 14

    ugly 6.1 unadj……

  22. zao commented on Nov 14

    I just checked your assertion. Unadjusted down 0.8% and seasonally adjusted -3.1%. wow! it should have been up between 15-20%. This is preposterous.

    THey just delayed FASB 157 for A WHOLE YEAR!

    wow! shame on me for shorting this market.

  23. Josh commented on Nov 14


    (1+.01)^12 – 1 = 1.13-1 = .13 or 13%

    The above math is incorrect. 0.1% is 0.001. The correct calculation is:

    ( 1 + 0.001 )^12 – 1 = 1.21%

  24. Unsympathetic commented on Nov 14

    The only thing the government number accurately reflects is their own ability to tamper expenses through decreasing / eliminating COLA increases to government employees and SS retirees.

  25. ron commented on Nov 14

    So Barry you don’t give a shit about being political correct, so what! That doesn’t mean that your position regarding run away inflation is correct. The current liquidity contraction sure doesn’t feel like inflation rather looks and smells like something else is brewing.

  26. muckdog commented on Nov 14

    PPI, .1%. Those are the numbers…

    Recession anyone?

    2007 GDP will probably come in around between 2% to 3%. Is that the new definition of recession ’round these parts?

  27. David commented on Nov 14

    “What’s in a name? That which we call a rose (Inflation) By any other name would smell as sweet.” Shakespeare
    Don’t you know, there is no inflation, on a adjusted basis it could be called deflation. *Sarcasm

  28. R commented on Nov 14

    “we have commodity price inflation… significant deflation in the money supply… expect the FED to continue to lower interest rates probably to zero”

    This makes sense. Given this scenario, equities will perform poorly while bonds and commodities rise correct?

    Where’s your money?

  29. Francois Theberge commented on Nov 15

    Barry wrote:

    “Since when did reality become such a subversive topic?”

    Hmmm! I presume your question was rhetorical, right?

    The example coming from the top is that spin, obfuscation, propaganda are the “tools” of true success.

    Just look at the behavior of our “leaders” in Big Business, certain media, politics and the judiciary, and the answer is rather clear: facts are a messy nuisance that dare to interfere with the beautiful clarity of ideology and prejudices.

    And that is now considered nothing short of intolerable. Just look at the visceral reactions of some posters on your blog…

  30. justin commented on Nov 15

    We are being pushed-down by deflating property values, and pulled-up by inflating everyday consumer goods. That can’t be good.

  31. The Big Picture commented on Nov 15

    PPI Follow Up

    This may be a bit wonky, but follow it thorough to the end. Yesterday, we discussed how you can avoid the usual seasonal adjustments and other shenanigans by using year-over-year prices. Those numbers reveal that inflation is far from benign. Rereading…

  32. lurker commented on Nov 15

    Yeah Barry–don’t ya know…lies are the new truth!!! George Orwell is grinning sadly from the great beyond…

  33. Jenna’s Bush commented on Nov 15

    Since when did reality become such a subversive topic?

    January 21, 2001

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