The Bureau of Labor Statistics released the January Producer Price Index statistics today and, despite the fact there isn't a very strong relationship between the PPI and consumer prices, the numbers weren't encouraging.
The Producer Price Index for Finished Goods advanced 0.3 percent in January, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed a 0.3-percent decline in December and a 0.7-percent rise in November. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.4 percent in January, after inching down 0.1 percent in December. The crude goods index fell 2.0 percent, following a 3.0-percent drop in December.
The big surprise was the jump in the index for finished producer goods excepting food and energy, the so-called core measure.
Prices for finished consumer goods other than foods and energy climbed 0.9 percent in January, after inching up 0.1 percent in December. The cigarettes index rose 3.4 percent in January, compared with a 0.1-percent increase a month earlier.
The cigarette reference points to a "technical factor," apparently having to do with tobacco price supports, but in the bigger picture the price increases were pretty broad based. Here's some perspective on those numbers, from MarketWatch:
Core inflation for wholesale goods in the United States increased at the fastest rate in six years in January, the Labor Department reported Friday...
In the past 12 months, the PPI is up 4.2 percent. The core PPI is up 2.7 percent, the biggest year-over-year gain in nine years.
The news rattled bond markets.
More commentary from Reuters...
"An exceptionally strong month in the core reading is likely overstating the inflation threat, but a threat is building," Stephen Gallagher, chief U.S. economist at SG Corporate & Investment Banking, said in a note to clients...
Some analysts said the Fed might have to re-evaluate the inflation outlook. "A number like this does not look well contained to the market," said John Caldwell, chief investment strategist at McDonald Financial Group.
... and Bloomberg.
"There is an inflation risk, not an inflation problem,'' said Ken Mayland, chief economist at ClearView Economics LLC in Pepper Pike, Ohio, and the best forecaster in Bloomberg News surveys for year ended in June 2004. "There are pressures in the supply chain and some of these are beginning to bubble up'...
"This need not set off alarm bells at the Fed but it bears watching,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.'
Finally, here, courtesy of the ever-reliable Erkin Sahinoz, is how the fed funds futures options reacted to the news: Not much effect for the March meeting...
But 75 basis points by May starts to make a small move...
... and is on the way to becoming the big favorite by July.
