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Producer Price Index (PPI) - Making Sense of it for You

|Includes: DGL, GDX, GLD, Western Asset Inflation Management Fund (IMF), SGOL, UGL, WIA, WIW

A day after the Chairman of the Federal Reserve gave the all-clear on inflation, the Bureau of Labor Statistics produced its monthly Producer Price Index (PPI) showing a rise in prices on the business level. A closer inspection of the data, ex-food and energy, would seem to resolve any inflation concern, except for an old troubling issue once regularly discussed here at the column, but since lost in the wake of recessionary deflation.

Producer prices were reported increased by 0.3% in October, marking the sixth monthly price rise of the last 12 months. Price increase in a period of recession might seem counterintuitive, but as we know well by now, Headline PPI is influenced by wild swings in energy prices. Taking a longer-term look at the metric shows the Headline Producer Price Index is in fact down 1.9% from where it stood a year ago. Recall, oil prices started their trek downward from mountainous peaks in July of 2008, and by October of that year still had a ways to fall. Despite the mid-term trend, though, dollar weakness and reviving Emerging Market demand (read China) seem sure to keep pricing stable-to-higher moving forward.

Both volatile components of Producer Prices that regularly drive wild monthly swings in Headline PPI, energy and food, increased a substantial 1.6% in October. Gasoline price increase of 1.9% was mostly behind the big increase in finished energy prices. Higher residential power costs and liquefied petroleum gas contributed the rest. On the Intermediate Goods level, higher diesel fuel and natural gas shipped to electric utilities and commercial electric power drove pricing. Behind all this were rising energy prices on the Crude Level. Natural gas prices increased 16.3% in October based on the BLS produced index, and higher coal and petroleum contributed as well.

A 9.0% higher Grains Index, and also increased prices for slaughter poultry, factored significantly in increased foods prices on the Crude Level. On the Finished Foods level, 24.2% higher vegetable prices led the push.

When excluding volatile food and energy prices from the October measurement, Core Producer Prices declined 0.6%. That's a figure we can find more consistent with the recessionary times. However, when compared against the prior year Core Producer Price Index, prices are actually up 0.7% versus year ago levels.

Today's reported PPI rise of 0.3% compared against economist expectations for a greater price increase of 0.5%. That's good news, but an even better result was found in the Core Producer Price Index comparison to expectations. The decline in Core Prices of 0.6% last month compared against economists' expectations for a rise of 0.1%. Core prices fell for the second month in a row (-0.1% in September), but have only declined four out of the last twelve months (though also 4 out of the last 6). So why then have prices held up relatively well in such a tumultuous environment? That's the subject of a follow on feature article coming soon.


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