Friday, December 14, 2007

The Producer Price Index is Up in October at the Fastest Rate Since 1973

Admittedly the Producer Price Index (PPI) is very volatile on a monthly basis, but the largest increase since 1973 is a bit worrisome (see graph below). The main driver is, of course, energy. The current economy feels in part like the economy of the 1970s. Test in bold is my emphasis. From the WSJ:

Producer prices rose last month at their fastest rate since 1973, underscoring why inflation remains a concern for the Federal Reserve, even as it grapples for ways to ease the credit crunch and avert a recession.

The Labor Department reported that producer prices jumped a seasonally adjusted 3.2% in November, as gasoline prices soared 35%. Prices excluding food and energy -- the inflation gauge followed more closely by economists and the Fed -- rose 0.4%. (Hmmm. Does not that mean there is no inflation except for those things where prices are going up?)

Producer prices, which reflect inflation at the wholesale level, are known for their volatility, especially on a monthly basis. Over the past year, they have risen 7.2% -- far less than the double-digit increases of the 1970s. Other factors continue to point to inflation risks, including the weakening of the dollar, which makes imports costlier, and proliferating reports of price increases by makers of food and other products. . . . .

. . . . . In the past few days, critics have lambasted the Fed for not being more aggressive in bolstering the economy. On Tuesday, the central bank cut interest rates by a quarter percentage point, and on Wednesday, it took other steps to encourage bank lending.

But some economists said the producer-price data -- and a separate report yesterday showing that November retail sales rose a strong 1.2% -- put the Fed action in a new light.

J.P. Morgan economist Michael Feroli said people who had accused the Fed of being "clueless" and "way behind the curve" now may realize that "growth is pretty resilient, and inflation isn't a nonissue."

When it cut rates Tuesday, the Fed said economic growth was slowing but also noted that high energy prices indicated that "some inflation risks remain."

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