The Producer Price Index (PPI) rose in December by 0.2% on a headline basis, and was unchanged after you strip out volatile food and energy prices to get the core index. This is down sharply from November when they rose 1.8% on headline and 0.5% on a core basis.
However, the deflationary readings of a year ago are starting to roll off, so the year-over-year change in the Producer Price Index rose to 4.4% from 2.4% in November. That tells you much more about a year ago — when the economy was on the edge of the cliff — than it does about conditions today.
In addition to the numbers for finished goods (referred to above), the report also looks further up the production chain, at intermediate and crude goods. To tell the difference between the three stages of production, think Bread (Finished), Flour (Intermediate) and Wheat (Crude). Both of the earlier stages showed bigger increases than did finished goods in December, but both are down sharply from the November rate of increase. In December intermediate goods producer prices rose 0.5%, but that is down from a 1.4% increase in November while crude goods prices increased by 1.0% in December after a 5.4% increase in November.
On a year-over-year basis, intermediate goods are up 3.0% while crude goods are up 12.3%. Crude goods are essentially commodities, and as such their prices tend to be far more volatile than those of finished goods, so the more extreme readings there are not a real surprise. Nor were there any big surprises relative to consensus expectations, although the headline number was expected to be 0.0%, so it was two ticks higher; the core number was expected to be up 0.1% so it was a tick lower, and provided an offset.
The big swing factor in the finished goods level was energy. Energy prices were down 0.4% (seasonally adjusted) in December after surging 5.7% in November on top of a 5.4% increase in October and are up 20.1% year over year. Food prices, however, moved the other direction, rising 1.4% in December after a 0.5% increase in November, but over the last year they are just up 1.1%.
Finished consumer goods have, however, increased in price over the last year far faster at 6.0% than capital goods, which are unchanged over the last year. Mostly that is from the non-durable side, specifically energy, which is up 20.1%. Finished consumer goods excluding energy are up just 1.5% over the last year. Prices for finished durable consumer goods have increased by just 0.3%.
Energy prices had collapsed at the end of 2008, so we are looking at a very low base. Of course, energy prices had also surged to very high levels early in 2008, which made for very easy year-over-year comparisons for most of 2009. The rebound in energy prices should, of course, bode well for the earnings of the big oil firms like Exxon (XOM) and Chevron (CVX).
Overall, this report provides more evidence that inflation is not a serious concern right now. Getting the economy moving and seeing some actual job creation is a far higher priority right now. This means to comply with its dual mandate of trying to achieve both price stability and full employment the Fed will have to keep interest rates at extraordinarily low levels for an extended period of time.
Historically, such an easy money policy has been very beneficial to stock prices. This report is almost certainly not the cause of the big sell-off today.
Read the full analyst report on “XOM”
Read the full analyst report on “CVX”
Zacks Investment Research
