The producer price index increased more than expected in December, rising
0.9% overall and 0.2% excluding food and energy. Forecasts were for
increases of 0.5% and 0.1%, respectively. The most important element of the
report is that it shows stickiness on the inflation front. While inflation
has moderated, the moderation has been small and it lacks persistence. For
example, it is notable that following a 0.9% decrease in core prices in
October, prices have since increased 1.5%, putting the 3-month rate of
change above the year-over-year gain of 2.0%. A new worry is the persistent
upward climb in food prices, which could supplant oil in bolstering
inflation expectations.
Driving the producer price index higher were products such as light trucks,
which increased 0.7% after increasing 13.7% in November, prescription drug
prices, which increased 0.6%, and railroad equipment, which increased 1.8%.
Food prices, increased 1.7%, the most since October 2003. Leading the
increase was a 26.3% gain in the prices of fresh fruits. Meats also
increased sharply, led by a 10.4% gain in the price of young chickens.
The increase in food prices won't go unnoticed by consumers and could
supplant energy prices as an influence on inflation expectations. In other
words, if consumer food prices rise, the rise in inflation expectations that
results from higher food prices could offset any decrease that occurs from
the decline in energy prices. It is notable that food prices account for
20.3% of the PPI compared to 20.1% for energy prices.
As usual, the more important number is the consumer price index, due out
tomorrow.
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Tony Crescenzi Blog Global Shipping Rates Up 1/16/2007 2:33 PM EST The Baltic Dry Index reached a 20-month high this month, indicating strength in the global economy.
Tony Crescenzi Blog Speculators Swing to Short on Oil 1/16/2007 10:41 AM EST Large traders are more bullish on oil than they have been in nearly a year.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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