The Producer Price Index (PPI) came in at a much-higher-than-expected 1.8% increase in November relative to October. In October, the PPI was up only 0.3%. The consensus expectations were for a rise of 0.8%.
The rise was for the most part due to a big jump in energy costs. Finished energy costs rose by 6.9% on the month following a 1.6% rise in October. This, in turn, was caused by a 18.3% rise in the cost of home heating oil following a 1.2% rise last month and a 14.2% jump in gasoline costs on top of a 1.9% rise in October.
Food prices were relatively well behaved, rising 0.5% on the month after a 1.6% gain in October. However, even after food and energy prices are stripped out, core inflation at the producer level was higher than expected, coming in with a rise of 0.5%, when a 0.2% rise was expected — a turnaround from the 0.6% decline in October.
On a year-over-year basis, total finished goods producer prices are now up 2.4%, marking the first year-over-year rise in a year. In October, the PPI was down 1.9% year over year. The very big price declines of a year ago are rolling off, and so the year-over-year inflation figures are going to be higher for some time to come. Core PPI was up 1.2% year over year in November, up from being just 0.3% higher year over year in October.
The recent decline in oil prices should mean that headline PPI in December will be much more tame than in November.
It was not all energy prices that were soaring, though, as residential natural gas prices rose just 2.3% for the month following a 0.2% rise in October. The year-over-year energy price numbers are all over the lot due to extreme fluctuations a year ago. Gasoline prices are up 35.9% from a year ago, while in October they were up just 8.2% — but year over year, home heating oil prices are actually now down 7.1% when they were up 10.8% on a year-over-year basis in October.
On the other hand, the level of home heating oil prices is much more significant in November than it is in October, and will be more important still in December and January. Those heating their homes with natural gas were actually paying 15.6% less than a year ago in November but were paying 3.9% more on a year-over-year basis in October. Thus, at least for the time being, lower heating costs are offsetting higher prices at the pump.
All the numbers I have discussed so far relate to finished goods. However, the report also looks further up the production chain at the price behavior of intermediate and crude goods. The best way to keep these groups straight in your head is to think Bread (finished), Flour (intermediate) and Wheat (crude).
Normally, intermediate goods prices are more volatile than those of finished goods, and crude goods, which are essentially commodities, are extremely volatile. At the intermediate level, prices were up 1.4% on the month following a 0.3% rise in October. On a year-over-year basis they are still down 1.6%, but that is up sharply from a 7.5% year-over-year decline in October.
Crude goods prices jumped by 5.7% on top of a 5.4% month-to-month rise in October. On a year-over-year basis, crude goods prices are up 4.7%, but in October they were down 14.1% year over year.
The higher-than-expected finished goods core index was partly due to higher prices for tobacco, which is probably the most benign source of higher prices out there. Tobacco prices rose 2.2% on the month, and are up 7.1% from a year ago (were up 2.2% year over year in October). One nice thing about selling an addictive product is that it allows firms like Altria (MO) and Reynolds American (RAI) to have pricing power even in an economic downturn.
The only other category in the core numbers to show a monthly increase in prices of more than 1.0% was a 1.6% rise in the costs of sanitary paper products, which might bode well for the profits of the likes of Kimberly Clark (KMB) and perhaps to some degree Procter & Gamble (PG). On the other hand, on a year-over-year basis, those prices are just up 1.9%.
Given that most of the increase was due to energy prices — and those should cool off in December — I don’t think the Fed will be overly concerned with this report, and they are likely to continue to keep interest rates low for all of 2010.
Read the full analyst report on “MO”
Read the full analyst report on “RAI”
Read the full analyst report on “KMB”
Read the full analyst report on “PG”
Zacks Investment Research
