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.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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.

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."

U.S. producer prices rocketed a seasonally-adjusted 1.4% in May, the U.S Labor Department announced Tuesday, as energy and food prices continued to increase wholesale costs at an alarming rate.

Economists surveyed by Bloomberg News had expected the April 2008 PPI rate to increase by 1.0%.

The core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, inline with the Bloomberg News estimate.

For the past 12 months, producer prices have increased 7.2% and the core rate has risen 3.0%. Also, the core intermediate PPI - a benchmark, leading indicator of inflation and one the U.S. Federal Reserve monitors closely, increased 2.0% in May 2008 -- its biggest increase since 1980.

Economist David H. Wang told BloggingStocks Tuesday "PPI inflation is now way too high. The Fed's period of interest rate accommodation ends with this report."

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.

The dollar rose Monday against the world's other major currencies, despite the fact the European Central Bank's president reiterated his concern about rising euro-zone inflation, which suggests there's little chance for an interest rate cut soon on the continent.

The dollar rose about 1 cent to $1.5511 versus the euro and about 1.2 cents versus the British pound to $1.9455. The dollar also gained about one-half yen to 104.68 versus Japan's yen.

The dollar rally occurred despite the fact that ECB President Jean-Claude Trichet reiterated to BBC Radio his concern about rising inflation, and its structural impact on Europe's economy, saying that "price stability ... is the best way to have a high level of sustainable growth and sustainable job creation."

Trichet's intransigence

Despite the U.S. economic slump, which has slowed economic growth both in Europe and in other developed-world markets, the ECB, unlike the U.S. Federal Reserve, hasn't budged regarding short-term interest rates, and kept its key rate at 4%. The ECB has cited the threat to inflation posed by rising oil prices, among other factors, as the primary reason for its stand-pat policy.

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%.

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.

What's going on here?

Producer prices fell 0.1% in December 2007, below the 0.2% consensus estimate, the U.S. Labor Department announced Tuesday.

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."

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.

Bernanke, who announced the changes during a speech Wednesday, said the Fed will now:

• 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.

Producer prices rose just 0.1% in October, while the core rated registered no increase, the U.S. Department of Labor announced Wednesday, with both stats coming in below consensus expectations.

The consensus had called for a 0.3% rise in PPI and a 0.2% rise in core PPI.

The October 2007 statistics were aided by falling energy prices, which fell 0.8%, including a 3.1% drop in gasoline prices and a 2.5% drop in heating-oil prices, the Labor Department said.

"All-in-all, it's a pretty good PPI report," economist M. David Chandler told bloggingstocks. "Of course, the October statistics don't reflect the delayed pass-through of higher gasoline prices and heating oil prices, which will probably show up in the November, but that still doesn't blot-out the fact that overall PPI costs were mostly contained in October."

However, on a 12-month basis, PPI is up 6.1%, while core PPI is up 2.5%. Both statistics exceed most economists' ceiling for reasonable PPI inflation in a growing economy.

"We still have above-average PPI on a 12-month basis, and I don't doubt that the Federal Reserve is watching this, particularly the core PPI," Chandler said.