Producer Prices Plunge In November - December 13, 2012
On a day when the investment community received data showing that retail sales advanced 0.3% in November, we also learned that producer (wholesale) prices for the same month were down sharply. Specifically, the Department of Labor reported that the Producer Price Index for finished goods fell 0.8%. The consensus expectation called for a decline of 0.6%. The primary reason was a 10.1% drop in gasoline prices.
A closer examination shows that the decrease in finished goods prices was led by the index for finished energy goods, which fell 4.6%. It marked the largest decline for the energy component since a 4.6% decrease in March of 2009. Prices for finished consumer foods rose 1.3%, the sixth consecutive monthly advance. Meanwhile, the index for finished goods less these two aforementioned volatile components advanced a rather tame 0.1%. Overall, prices for finished goods advanced 1.5% for the 12 months ended November, 2012, the smallest increase since a 0.5% rise for the 12 months ended July, 2012.
The latest report is both a good and bad snapshot of current economic conditions. On the negative side, the data suggest that economic growth in this country is proceeding at a mundane rate right now, which is not surprising given the recent data on employment, retail sales, and manufacturing and non-manufacturing activity. Conversely, the retreat in prices suggests that inflation is not a big issue for the central bank at this moment and is more evidence why Fed Chairman Ben Bernanke is keen on stimulating the economy through aggressive bond buying. Just yesterday, the lead bank committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion per month in mortgage-backed bond buying program that commenced in September.
The benign inflationary environment also allows the Federal Reserve to keep the federal funds rate at a record low. It is more ammunition for the Fed to maintain its current accommodative monetary policies, with its main focus being making a significant dent in the nation’s stubbornly high unemployment rate, which currently stands at 7.7%. Our sense is that the low interest-rate environment may be in place until at least the late stages of 2014, if the lead bank’s intermediate-term goal is to reduce the unemployment rate to around 6.5%.
All in all, the latest wholesale pricing data reinforces the Federal Reserve’s decision yesterday to keep its accommodative monetary policies in place. Investors should note that we will receive the Labor Department’s companion report on consumer prices at 8:30 AM (EST) tomorrow.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.