PPI Jumps Fully 2% - A Closer Look

by: Barry Ritholtz
Tales of Inflation's demise have been greatly exaggerated.

PPI -- 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.         

core PPISix 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.

For the rolling 12 month period ending in November, wholesale prices rose 0.9%. Since energy prices collapsed following the changes in the GSCI, inflation has been below levels seen in the spring and summer. Year over year, core PPI was up 1.8%.

How did the numbers break down? WSJ reports:

core PPI

"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.

Sources:

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
http://www.bls.gov/ppi/

U.S. Economy: Producer Prices Soar
Shobhana Chandra and Robert Willis
Bloomberg, Dec. 19 2006
http://www.bloomberg.com/apps/news?pid=20601087&sid=alSgWzx.V4yA&refer=home

Producer Prices Climbed in November, Suggesting Inflation Pressures Linger
BRIAN BLACKSTONE and JEFF BATER
WSJ, December 19, 2006 9:31 a.m.
http://online.wsj.com/article/SB116653481595854491.html