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April 19, 2005
The PPI Report: Headline Bad, Core Good
Soaring energy prices pushed U.S. producer prices up by 0.7% in March, but core inflation remained tame, the Labor Department reported Tuesday...
The 0.7% increase in the Producer Price Index was a bit higher than the 0.6% expected by Wall Street economists, but the 0.1% gain in the core rate was much lower than the 0.3% estimated in the survey conducted by MarketWatch. The PPI is now up 4.9% in the past 12 months. The core rate has risen 2.6% year-over-year, down from the 13-year high of 2.8% recorded in February...
Energy was the main culprit in the March PPI, with energy prices rising 3.3%, the largest gain since October when a similar oil spike shook the U.S. economy. Wholesale gasoline prices jumped 5.3%, home heating oil prices rose 15.7% and residential natural-gas prices rose 2.3%
In other words, everyone was expecting the big push from energy prices. That the effects on prices did not extend much beyond that sector has made some people positively giddy:
"The inflation 'scare' is officially over," said Ken Mayland, chief economist for ClearView Economics. "While there are still some price increases bubbling up the supply chain to consumers, lower expectations of U.S. industrial growth and world growth are relieving the pressures on oil and raw material prices."
OK, not everyone...
However, another economist said core inflationary pressures are likely to pick up as firms regain pricing power. "Given these inflationary pressures, monetary policymakers are unlikely to change course in the months ahead," said Mark McMullen, an economist for Economy.com
... but there were plenty of encouraging words to go around. From Reuters:
"On the whole this will assuage some of the concern that's been bubbling up about inflation since the start of the year and should keep the Fed on its measured path for now," said Richard Dekaser, chief economist at National City Corp. in Cleveland.
And this, from the Wall Street Journal Online,
The inflation picture looks less bleak than following the January PPI [when core goods jumped 0.8%]... UBS economists said in a note.
To be sure, that note did come with an appropriate caveat:
... it is not yet really worry-free for the Fed...
There were renewed signs of bubbling inflation further back in the pipeline, as prices for "intermediate" and "crude" goods -- the yarn and wool to make a finished sweater, for example -- grew at a faster pace. But so far, goods sellers have had a hard time pushing those higher input costs to the retail level, keeping consumer price growth tamer and letting the Fed move slowly in its months-long campaign to raise interest rates. "There was nothing in this report to argue for a change in inflation's trajectory in upcoming months," David Resler, chief economist at Nomura Securities, said in a note, "or anything in the report to alter the Fed's current trajectory."
That last bit is important. I think there is a reason that the market has chosen to look through the headline figure to the ex energy statistic: Fed credibility. This type of reaction was almost unthinkable in the 1970s, precisely because the resolve of central bankers was so much less convincing. Things could always change, of course, but as Tom Maguire has noted, the suddenly fashionable bandying about of the "S word" requires, for now, a significant depreciation of the stagflation trademark.
UPDATE: There's even more (typically useful) discussion at Capital Spectator.
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