Price-Data Apologists, Take Heed

Looking at some facts about the wholesale price measure that some observers prefer to ignore.
Author:
Publish date:

Our Lips Are Sealed

JACKSON HOLE, Wyo. -- What to say?

Every major

Producer Price Index

category -- all 11 of them --

posted an increase last month.

That is a fact.

We haven't seen an across-the-board increase in producer prices like that in more than three years.

That's also a fact.

Some key producer price indices -- such as the finished consumer goods index and the core (excluding food and energy) intermediate goods index -- have been turning in increases for seven straight months.

That's another fact.

And yet still.

Still there remain out there diehard members of the costs-and-prices-are-in-no-way-rising-(and-will-not-rise) camp who dismiss recent PPI increases because they owe solely to a select few items. (See this recent

column for more on exclusion, and note the great crack on the subject in

Jim Griffin's

excellent

piece.)

Who chalk up recent PPI increases to faulty seasonal adjustment.

Who claim that recent PPI increases were temporary -- and who promise they will reverse in short order.

How to respond?

With yet more facts.

The producer price indices measure changes in prices received by producers.

That is a fact.

The firm paying those higher prices to producers -- the firm facing higher input costs -- must either pass them on or eat them.

That's also a fact.

The central bank frets about both the

end-of-the-loss-of-pricing-power and the

shrinking-profit-margin problems.

That's another fact.

And yet still.

Still there remain out there folks who tell you on Friday that producer prices mean nothing for consumer prices.

It is (of course) somewhat fascinating that they fail to mention on Monday that they have raised their consumer price estimates by a tenth.

Still there remain out there folks who, because a similar one five years ago never filtered through to consumer prices, advise to ignore the increase in producer prices.

It is (of course) somewhat fascinating that they fail to mention that bonds got hammered that year.

Still there remain out there folks who, while commodity prices plunged for months on end, screamed that a falling PPI was a clear signal that the central bank was way too tight.

It is (of course) somewhat fascinating that the recent upmove is nothing more than a rebound -- and a fully expected one -- from unusually depressed levels.

Enough already.

Take aim at these people.

And take (pause) them (pause) down.

Pin them by the elbows. Grab the sharpest needle you can find.

And use a cross-stitch to sew their lips together.

Vacation

The market is looking for the core

Consumer Price Index

to print three-tenths tomorrow.

Two questions.

(a) Is a northside surprise likely?

The core CPI has printed four-tenths or higher only twice since 1994 -- and neither increase came against a jump in PPI prices like the one we saw last month.

Matter of fact, both increases came as the result of a big combo increase in the housing and medical care indices -- together these two account for almost half of the total CPI -- and that's what it would take to produce a similarly big core number this time around.

Could it happen? Absolutely. The medical care index posted three above-trend increases between April and August. Another one in September, coupled with an above-trend increase in housing -- the economists at

Goldman

note that the equivalent rent

portion of that index is overdue for an appreciable advance -- would produce an upside core surprise.

The factors working against one?

The fact that the market exhibits a tendency to overestimate the September CPI.

The fact that the government statistics agencies seem to spit out a kind price number every time the market really needs one.

The fact that your narrator mentioned the possibility.

(b) Is there a good trade here?

Well sure.

A huge PPI print ultimately sent money to Treasuries from shares.

Yet that bond-equity thing won't work with the CPI.

Sell the farm on a big number. Buy another one on a small one.

And on a three-tenths core?

Go back to bed.