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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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March 21, 2006


The February PPI -- Hot Or Not?

Sometimes, the headlines are just plain confusing.  Here is the opening, from Forbes.com, on the February producer price index report:

Wholesale Inflation Slips 1.4 Pct. in Feb.

But then there was this, from TheStreet.com...

PPI Sends Mixed Signals

... and this, from Reuters:

US rate futures sag as PPI fuels inflation fears

Well, if you've been paying attention, you already know that the answer is in this headline, from MarketWatch:

PPI falls 1.4% on sagging energy prices
Core rate rises more-than-expected 0.3% in February
The article continues:

U.S. wholesale prices plunged 1.4% in February on lower food and energy prices but core prices were surprisingly high for the second straight month, the Labor Department reported Tuesday.

"All is not quiet on the inflation front," said Michael Gregory, an economist for BMO Nesbitt Burns. "Commodity prices and capacity constraints still pose some inflation risks."...

In the past year, the PPI has risen 3.7%, compared with 5.7% last month. The core rate has accelerated to a 1.7% increase in the past 12 months, compared with 1.5% a month ago.
Worried?  A few years back, the Jonathon Weinhagen took a look at what we think we know about the relationship between producer prices and broader measures of consumer prices.  If terms like "VAR", "variance decompositions", and "impulse responses" mean something to you, you may want to take a look at his article, which appeared in the November 2002 edition of the Monthly Labor Review.  If that doesn't sound too interesting to you, here is what Jonathon concluded:

Several authors have investigated the causal relationship between commodity prices and consumer inflation... The common finding in the majority of these studies was that the power of commodity prices to predict CPI inflation has diminished since the 1980s...

A visual examination of price movements shows that, during the 1970s and 1980s, changes in the indexes for the prices of crude and intermediate goods often preceded changes in the CPI. Since the early 1990s, however, price movements at early stages of processing do not appear to have foreshadowed movements in the CPI...

... [formal statistical tests] illustrate that, from 1974 to 1989, price movements in crude, intermediate, and finished goods were transmitted forward to the CPI. In comparison, from 1990 to 2001, only changes in the PPI for finished goods caused movements in the CPI...

Taken as a whole, the results from the various empirical tests suggest that there was significant forward price transmission in both subperiods examined. However, from 1990 to 2001, price transmission from the earlier stages of processing—crude and intermediate goods—to the later stages of processing—finished goods and the CPI—was
weaker relative to the earlier subperiod. By contrast, the causal price relationships between the finished-goods index and the CPI have strengthened since 1990.

Again from the MarketWatch article...

... core intermediate goods prices rose 0.5% in February and are now up 4.8% in the past year. Core intermediate goods prices are a key measure of commodity inflation pressures.

... but:

Finished capital goods prices rose 0.1% in February.

That, I think, puts things in a little better light.

March 21, 2006 in Data Releases , Inflation | Permalink

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Listed below are links to blogs that reference The February PPI -- Hot Or Not? :

» The Relationship Between Input and Output Price Inflation from Economist's View
David Altig's post at macroblog on the relationship between shocks to the producer price index (PPI) and changes in the (CPI) piqued my interest: macroblog: The February PPI -- Hot Or Not?: ...A few years back, Jonathon Weinhagen took a [Read More]

Tracked on Mar 23, 2006 12:47:25 AM

Comments


competition is intense at the finished goods level, which keeps prices in check (inflation low) even though input prices (commodities) may be going up.

anti-trust efforts - Wal mart, Oil, Microsoft - help fight inflation. Free trade too - foreign goods are cheap.

Posted by: anon | March 21, 2006 at 10:11 PM

I am very surprised at the continuation of the low PPI numbers given the increase in the price of oil. This helps explain it. I think that we are way more efficient at production than we used to be too. This has cut costs, along with the decreased cost of foreign labor.

There is intense competition among retailers, but I think the availability of goods over internet has done a lot to keep them in check too.

Posted by: Jeff | March 22, 2006 at 05:54 PM

One of the numbers I watch is the price index for imports of consumer goods excluding autos and oil. I think it does a very good job of capturing the impact of foreign competition on the goods side of the CPI. After serveral years of this index faling it now appears to be strating to rise. in other words the power of foreign competition to keep domestic producers from raisin prices seems to be diminishing.

Posted by: spencer | March 23, 2006 at 08:50 AM

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