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donsutherland1 · 06-17-08, 08:48 AM

The Producer Price Index (PPI) for May 2008 rose by 1.4% (an annualized 18.2%), which was above the 1.0% consensus forecast. Nevertheless, it is more than likely that inflation doves will largely ignore the headline figure and instead point to the 0.2% (2.4% annualized rate) increase in the core PPI (which excludes food and energy prices) to argue that inflation is not a gathering problem.

However, a closer look at the data suggests that the seemingly tranquil look on the core PPI front might not endure. Instead, a look at the intermediate and crude goods data shows a piling up of inflationary pressures--both headline and core.

In terms of intermediate goods, one has witnessed a quickening of the 12-month change in the headline price from 8.9% in January to 12.6% in May. Moreover, one has seen a steady rise in the monthly core rate for intermediate goods to 2.0% (26.8% annualized rate) in May. The last three months have seen the core intermediate goods index rise by 1% or more.

The same has held true with respect to crude goods. The 12 month change in the crude goods price has now come to stratospheric 41.5%. In addition, the core figure for crude goods has increased by more than 3% (42.6% annualized rate) for the last five months.

All said, there is building inflationary pressure in the pipeline. Recent data in the Fed's Beige Book suggested that some firms are successfully passing on higher costs to consumers and others are planning to attempt to do so. In short, inflation is leaking into the broader economy and there is a prospect that one could see the core rate begin to rise down the road.

In my view, a 25 bp increase in interest rates (not likely this month) this month could not be more timely and might be helpful in dampening growing inflation expectations. Unfortunately, I do not believe the Federal Reserve will make an interest rate move in its upcoming meeting later this month. Perhaps August 5 (after Q2 growth data is available) or October 29 (after Q3 figures are available) would offer additional logical points at which to raise rates.

Should the Fed fail to raise interest rates through the fall and should inflation not only continue to rise but also begin to manifest itself more strongly in the core price indices, already elevated inflationary expectations could become unanchored. If so, the nation's rising inflation problem could grow both in magnitude and persistence. Then the monetary policy prescription necessary to roll back the inflation could be much stronger than would otherwise be required and the economic price paid might well be a fairly significant recession as opposed to a milder economic slowdown or contraction.

06-17-08, 08:48 AM	#1 (permalink)
donsutherland1 Moderator Mod team member Join Date: Oct 2007 Last Online: Today 09:20 PM Location: New York Posts: 2,447 Thanks: 810 Thanked 1,560 Times in 871 Posts Lean: Centrist Gender: Awards:	May Producer Prices Rocket 1.4% The Producer Price Index (PPI) for May 2008 rose by 1.4% (an annualized 18.2%), which was above the 1.0% consensus forecast. Nevertheless, it is more than likely that inflation doves will largely ignore the headline figure and instead point to the 0.2% (2.4% annualized rate) increase in the core PPI (which excludes food and energy prices) to argue that inflation is not a gathering problem. However, a closer look at the data suggests that the seemingly tranquil look on the core PPI front might not endure. Instead, a look at the intermediate and crude goods data shows a piling up of inflationary pressures--both headline and core. In terms of intermediate goods, one has witnessed a quickening of the 12-month change in the headline price from 8.9% in January to 12.6% in May. Moreover, one has seen a steady rise in the monthly core rate for intermediate goods to 2.0% (26.8% annualized rate) in May. The last three months have seen the core intermediate goods index rise by 1% or more. The same has held true with respect to crude goods. The 12 month change in the crude goods price has now come to stratospheric 41.5%. In addition, the core figure for crude goods has increased by more than 3% (42.6% annualized rate) for the last five months. All said, there is building inflationary pressure in the pipeline. Recent data in the Fed's Beige Book suggested that some firms are successfully passing on higher costs to consumers and others are planning to attempt to do so. In short, inflation is leaking into the broader economy and there is a prospect that one could see the core rate begin to rise down the road. In my view, a 25 bp increase in interest rates (not likely this month) this month could not be more timely and might be helpful in dampening growing inflation expectations. Unfortunately, I do not believe the Federal Reserve will make an interest rate move in its upcoming meeting later this month. Perhaps August 5 (after Q2 growth data is available) or October 29 (after Q3 figures are available) would offer additional logical points at which to raise rates. Should the Fed fail to raise interest rates through the fall and should inflation not only continue to rise but also begin to manifest itself more strongly in the core price indices, already elevated inflationary expectations could become unanchored. If so, the nation's rising inflation problem could grow both in magnitude and persistence. Then the monetary policy prescription necessary to roll back the inflation could be much stronger than would otherwise be required and the economic price paid might well be a fairly significant recession as opposed to a milder economic slowdown or contraction. Last edited by donsutherland1 : 06-17-08 at 09:00 AM.

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