2008's economy can be divided into two parts. The first is the period between January and July when oil prices ran up to $147 thanks to a speculative trade to short the dollar and buy oil and other commodities. The second part is the post oil's July peak where oil prices have featured a 60% to $55. Today's wholesale price report shows what happens to prices when supply exceeds demand and banks stop lending money to traders trying to profit from anticipated inflation.
Today's wholesale price report is a doozy. The Producer Price Index (PPI) fell 2.8% in October -- much more than the 1.8% decline economists had anticipated. The PPI decline was fueled (pun intended) by a 12.8% decline in energy prices in October. And as long as those energy prices keep falling, inflation will be in full downswing mode. (I am happy to report that I won my bet that gasoline would drop below $1.99 a gallon in Eastern Massachusetts by February -- I went to a station Sunday that charged $1.97.)
But there's more to it than simply declining oil prices. The entire economy was producing goods and services based on an assumption about demand that depended on easy access to debt. By shutting off the debt flow, goods are simply too expensive for consumers and businesses to pay the price. This means businesses will cut back on production and slash prices to clear their shelves of inventory. Then they'll shut down factories and lay off workers. And the lower demand from those poorer former workers will start the cycle anew.
U.S. investors and consumers haven't received much good news lately, which is why Friday's producer price index report was a welcome sight.
U.S. producer prices fell a seasonally-adjusted 0.9% in August, the U.S Labor Department announced Friday, as lower energy prices provided some hope that inflation at the wholesale level will moderate in the months ahead.
Economists surveyed by Bloomberg News had expected the August PPI index to fall 0.5%. Producer prices increased 1.2% in July, 1.8% in June, 1.4% in May, and 0.3% in April.
Meanwhile, the core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, in-line with the Bloomberg News 0.2% consensus estimate.
Economist Peter Dawson told BloggingStocks Friday the August PPI is a pleasant sight for a U.S. market and an economy that's grappling with a series of financial and economic hurdles.
"The report shows a pull-back in energy prices, which is welcome, as it's been the primary culprit in both wholesale and retail inflation," Dawson said. "If wholesale prices continue to trend lower, that will ease pressure businesses face to raise prices to keep pace with costs. Lower oil and gasoline prices will also provide a modest amount of stimulus to the U.S. economy, as it will increase consumer disposable income."
U.S. producer prices soared a seasonally-adjusted 1.8% in June, the U.S Labor Department announced Tuesday, as rising energy prices continued to increase wholesale costs at an alarming rate.
Economists surveyed by Bloomberg News had expected the June PPI index to rise 1.4%. Producer prices increased 1.4% in May and 0.2% in April.
The core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, below the Bloomberg News 0.3% consensus estimate.
Economist Peter Dawson told BloggingStocks Tuesday the June PPI is another unfortunate data point for the economy, but it's not as bad as it appears. "The report is bad, but not as bad as it could have been. Energy really drove the index higher. If you took out gasoline prices, PPI would be down a half percentage point," Dawson said. "That said, energy prices are still rising at an alarming rate and they're a cost concern for businesses and individuals alike."
The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang.
"It's beginning to look like a re-run of a show we don't want to see, 'That 70s inflation show,' " Wang said. "Oil is increasing inflation throughout the U.S. economy and you can really see it at the producer level."
During the past 12 months, producer prices have increased 6.5% and the core rate has risen 3.0%, according to U.S. Labor Department data released Tuesday. Other producer price index surges occurred in 1974, 1980, and 1991. What do the three have in common? You guessed it. They were periods when the price of oil increased by a large percentage, Wang said. The 1991 event was more of an oil spike, but the other two were the first two oil shocks, in 1973-1974 and 1979-1980, he said.
Oil's current march higher, up 100% in the past 12 months to about $129 per barrel, and up about 480% since 2002, does not qualify as an oil shock just yet, but it's close and getting there, Wang said, and inflation has trended higher in tandem with oil's latest run-up.
U.S. producer prices increased a scant 0.2% in April 2008, as auto and furniture costs offset substantial rises in food and energy prices, the U.S Labor Department announced Tuesday.
However, the core rate, which excludes food and energy costs, increased 0.4% -- a pace well above consensus expectations. Economists surveyed by Bloomberg News had expected the April 2008 PPI index and core rate to increase by 0.4% and 0.2% respectively.
So far in 2008, producer prices are increasing at an alarming annual rate, 8.5%, compared to 8.4% for the same period a year ago. The core rate is increasing at a 5.2% annual pace, compared to 2.1% for a year ago.
12-month PPI accelerates
For the past 12 months, producer prices have increased 6.5%, and the core rate has risen 3.0%. The core rate's advance is the largest year-over-year core rate increase since 1991.
March producer prices increased by more than double the amount forecast, as higher fuel and food costs worked their way into the commercial system, the U.S Labor Department announced Tuesday.
Producer prices increased 1.1% in March 2008, while the core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said.
Economists surveyed by Bloomberg News had expected the March 2008 PPI index and core rate to increase by 0.5% and 0.2%, respectively.
PPI surging
So far in 2008, producer prices are increasing at an alarming rate, a 10.2% annual rate, compared to 8.4% for the same period a year ago. The core is increasing at a 5% annual pace, compared 2% for a year ago.
For the past 12 months, producer prices have increased 6.9%, and the core rate has risen 2.7%.
Economist Steve Affinito told BloggingStocks Tuesday the March statistic is more evidence of the effects of record-high oil prices. "It's another hot number, and cost pressures are increasing," Affinito said. "The core PPI is somewhat deceptive because we can see the effect of high oil costs working their way through the commercial process. No question, PPI inflation is rising, which means consumer prices will increase."
In March 2008, food prices rose 1.2%, led by an 8.7% increase in the price of rice, and a 15.4% increase in vegatables. Energy costs rose 2.9%, led by a 15% increase in diesel and a 13% increase in home heating oil. Raw material costs surged 8.8%. Auto costs fell 0.2%.
Meanwhile, the core PPI rate, which excludes food and energy costs, increased 0.4%, also well above the 0.2% estimate.
The 1% January 2008 PPI increase follows a 0.3% increase in December 2007.
Economist Steve Affinito told BloggingStocks Tuesday the January PPI stat is going to make it very rough for the U.S. Federal Reserve to maintain low interest rates for a long period of time.
Fed won't be pleased
"Wow! This number is hot, really above what we expected," Affinito said. "This almost guarantees that the Fed will be raising interest rates in a year about as fast as they lowered them this year. We have accelerating inflation at the wholesale level, so expect the Fed to clamp down on these inflationary pressures at the first sign they believe the economy is growing."
New York Yankee Hall of Fame catcher Yogi Berra, noted for his incisive malapropisms, once remarked about his ballclub's prospects, "The future, it ain't what it used to be."
Well, to quote Yogi, the U.S.'s economic future ain't what it used to be, but as my BloggingStocks colleague Peter Cohan observed, it may not be what some economists currently make it out to be, either.
Cohan asked "Is the 'recession' real?" and argued that one could make a case that not enough evidence exists to suggest the U.S. is in recession -- two consecutive quarters of negative GDP growth has not been measure yet. Further, some sectors of the economy, including oil, oil services, energy, alternative energy, and farming, among others, are doing well.
Still, housing is in its worst slump in more than 20 years, consumer spending growth is modest at best, consumer confidence is low, and one need not list the litany of concerns regarding mortgage lenders and related asset-back securities and banks.
Meanwhile, the core PPI rate, which excludes food and energy, increased 0.2%, in-line with the 0.2% estimate. In December, wholesale energy prices fell 1.9%, while food prices increased 1.3%
2007 PPI at uncomfortable levels
Still, despite December's mild PPI report, producer prices increased at an above-average rate of 6.3% during 2007 -- the index's biggest jump since rising 7.1% in 1981 -- and well ahead of the 1.1% rise for 2006. Core PPI increased 2.0% in 2007, the same rate as 2006.
The U.S. Federal Reserve uses the PPI as one gauge for both wholesale-based and consumer-based inflation. Historically, a rise in PPI generally signals a rise in consumer prices down the road.
Economic Analysis: A good news / bad news PPI statistic. December's 0.1% PPI decline is welcome news, but it caps a terrible year for prices at the wholesale / commercial level driven by surging commodity costs. Even so, the 2007 PPI performance is unlikely to change the U.S. Federal Reserve's easing monetary policy stance. Further, analysts expect wholesale inflation to moderate slightly in 2008, due to a slowdown in the U.S. economy.
U.S. Federal Reserve Chairman Ben Bernanke's signal, in a speech Thursday, that more interest rate cuts are on the way, should not cause Congressional officials to be less lax regarding fiscal policy stimulus, economists and analysts told BloggingStocks Thursday.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Bernanke said in a speech before a business group in Washington. Bernanke added that, "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
A housing sector that remains in correction mode, to put it diplomatically; a contracting manufacturing sector; declining auto sales; a pull-back in consumer spending; anemic job growth -- historically, these would signal a no-doubt-about-it easing monetary policy by the U.S. Federal Reserve to stimulate the economy.
But hold on, the nation's economic landscape is not that simple, as Fed Chairman Ben Bernanke would no doubt tell you.
Inflation, at both the consumer and producer levels, is rearing its ugly head. Fanned higher by the near-record price of crude oil, inflation is already above the Federal Reserve's target zone (also called the Fed's "comfort zone"), and is likely to move higher later this year if +$80 per barrel oil persists. (Oil fell $1.90 to $97.28 Friday afternoon on fears of a U.S. recession.)
The nation's economy created just 18,000 jobs in December 2007, substantially below the 70,000 estimate, the U.S. Labor Department announced Friday, sparking fears that the sluggish U.S. economy is now sapping the market of even modest job growth.
Further, the unemployment rate also jumped three-tenths of one percent to 5%. The jobless rate had been below 5% for more than two years.
Pressure builds on Fed
"We've gone from tepid job growth to anemic job growth," economist Steve Affinito told BloggingStocks Friday. "There's no question this puts more pressure on the Federal Reserve to cut interest rates. At least one more rate cut is a done deal, and they'll probably have to cut two more times, or more. The Fed will also want to see data on job creation in January and February, but we can't have an economy creating 20,000 jobs a month. That's nowhere near enough." Affinito added that he expects the Fed to cut key short-term interest by an additional 50-75 basis points.
Producer prices rose 3.2% in November 2007, more than double the 1.5% consensus estimate, as a record one-month rise in energy costs pushed business operating expenses higher, the U.S. Labor Department announced Thursday. The November 2007 stat was the biggest one-month increase since August 1973.
Core producer prices, which exclude food and energy, increased 0.4% in the month, the Labor Department announced. In October 2007, the PPI increased 0.1%, with core prices registering no increase.
Producer prices are up 7.2% in the past 12 months -- the largest change since 7.5% in October 1981. Core prices are up 2.0% in the past 12 months.
Economic Analysis: The November 2007 report underscores that energy continues to be a major factor in both wholesale and retail inflation and also complicates the task of policy makers, especially the U.S. Federal Reserve. Already laden with the task of maintaining credit liquidity and stimulating the U.S. economy, the Fed also has to keep an eye on inflation, which, driven by high energy costs, is in danger of spiraling to higher levels.
A food policy research group is predicting substantial increases in food prices, arguing that a combination of factors will lead to rising food prices "for the foreseeable future."
The International Food Policy Research Institute said a major secular trend -- falling food prices prompted by high-yield grains and technological advancement, among other factors -- is set to end.
IFPRI Director Joachim Braun said climate risk and climate change, rising demand for food in emerging markets, and trade barriers will contribute to higher food prices in the decades ahead. For example, global warming is expected to decrease global agricultural production by 16% by 2020, while China and India and other rapidly-developing markets increase demand for meat and dairy products, increasing the price of those goods, as well as grain.
The initial analysis regarding U.S. Federal Reserve Chairman Ben Bernanke's major changes to the Fed's communication strategy is that the changes, via increased information, will enhance the market's ability to identify and analyze Fed policy.
publish economic forecasts quarterly, up from semi-annually. (These reports will include forecasts for economic growth, unemployment and inflation.)
publish a 3-year horizon analysis, up from a 2-year analysis, and this section will also include "a narrative" that summarizes the views shaping the outlook, as well as the breadth of views among Fed governors.
publish a price gauge prediction for headline inflation (which includes food and energy costs), as well as a prediction for core inflation.
The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang. 
March producer prices increased by more than double the amount forecast, as higher fuel and food costs worked their way into the commercial system, the 
The U.S. Labor Department announced Tuesday 
New York Yankee Hall of Fame catcher 
A housing sector that remains in correction mode, to put it diplomatically; a contracting manufacturing sector; declining auto sales; a pull-back in consumer spending; anemic job growth -- historically, these would signal a no-doubt-about-it easing monetary policy by the U.S. Federal Reserve to stimulate the economy. 
The nation's economy created just 18,000 jobs in December 2007, substantially below the 70,000 estimate, 
A food policy research group is predicting 
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