The Wall Street Journal (subscription required) reports that producer prices launched upward at a 1.2% monthly rate in July. The rise in the PPI -- which was 0.7 percentage points faster than the 0.5% rate economists expected -- was the result of rising wholesale prices for energy spreading to "automobiles, prescription drugs and capital equipment."
Since the price of oil has dropped 24% from $147 to $112, should we all be relieved that July's number is a temporary blip? Let's hope so, because if not, rising wholesale prices make it even harder for businesses to make a profit when consumer demand is weak.
These higher wholesale prices mean that businesses have two options to maintain profits: keep prices the same but cut costs in other areas by finding productivity improvements, cutting back on payrolls and salaries and the likes, or raise prices to offset those rising costs.
Neither of these options is good for the consumer. If companies cut costs, that will mean more layoffs and weak wage growth. If companies raise prices, that will mean higher prices on consumer goods. Either option means that the middle class squeeze will become more uncomfortable.
If government can crack down on energy speculation -- which accounts for 50% to 60% of trading volume -- and do a better job of fiscal management -- by raising interest rates, balancing the budget, and reducing government borrowing -- then energy prices are likely to continue to fall due to a stronger dollar.
And while government is doing all that, it might also want to examine why gasoline prices have fallen only 9% -- I paid $4.15 a gallon at peak for mid-grade and now pay $3.79 -- while crude costs have declined 24%.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-19-2008 @ 10:21AM
steven marks said...
The situation with the economy is worse than most people think! All (but the government) think it's BAD, but it's in critical condition! If the government were to post the TRUE statistics of inflation and unemployment without the sugar coating, Americans would see that we're in a DEPRESSION! There would be runs on banks, food hoarding and chaos! Not as bad YET as the 1920's, but soon to be seen. The writng's on the wall. A country cannot just print money and have it respected as face value tender. The value of our dollar is on a steady decline worldwide against most currencies (don't believe the short "bumps" that show the dollar is improving). Our buying power is DOWN, unemployment is UP, prices are UP, foreclosures are UP, bank failures are UP and our outlook is POOR! If this isn't a depression, then what is it..we passed recession a long time ago!
8-19-2008 @ 12:13PM
william lindblad said...
Peter, you're right, however you, I and all that pay attention have the same question regarding why energy prices have not fallen at the pump. My speculation is this: when the prices increased at the wholesale level it was passed immediately to all level of supply. This has some interesting aspects as the retail station level usually operates on a small profit bases (per gallon). So, the delivery truck fills the tanks at say, 3.60 per gal., they charge 3.65. Let's make this delivery on Tues. On Wed. the wholesale price increases 2 cents - Thur. they increase retail 2 cents. These fellows are profit minded and this is an opportunity. When they get their next delivery next Tue., the wholesale price dropped 10 cents. The underground tanks hold 20,000 gals and they only sold 15,000. Since they have 5,000 gals still undersold and paid at 3.60 the new 15,000 at 3.50 is not going to come to the pump at full reduction. THEY ARE STUCK WITH THE DIFFERENCE, WHICH IS A MINUS. That is why up is quick and down slow.
To the rest of the article - yup! - just about all manufacturers are "between a rock and a hard place"
The Fed blew it and should have raised by a 1/4 as it would have pressured both the dollar/euro balance and consequently, oil. The Fed has put to much into Wall St. concerns and has forgotten their mission. They are acting little better than the OFHEO that was supposed to watching Fannie & Freddie.
The other post is very negative and he has a lot of company - me included.
8-19-2008 @ 1:38PM
David Huston said...
Well which is it? Are astronomical energy prices "50 - 60%" energy speculation, or are Bush and his henchmen correct, along with most Wall Streeters, and are they mostly the result of the operation of supply and demand forces? Note, they can't be both!!!!!!!!