Inflation Remains Benign - April 12, 2013
On a day when the investment community received a less-than-flattering report on March retail sales, 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 0.6%. The primary catalyst was a 6.8% drop in gasoline prices, which accounted for more than 80% of the March decline.
However, a closer examination of the pricing data paints a somewhat mixed picture. On the positive side, the decrease in finished goods prices was led by the index for finished energy goods, which fell 3.4%. Declines in home heating oil and liquefied petroleum gas prices were behind the tame energy costs. Conversely, prices for finished consumer foods rose 0.8%, the largest advance since a 1.1% rise in November, 2012. Most important, the index for finished goods, less these two aforementioned volatile components, rose a modest 0.2% in March, with almost one-quarter of the advance driven by prices for civilian aircraft, which rose 0.7%. Overall, prices for finished goods advanced 1.1% for the 12 months ended in March. The rate of advance was the smallest year-over-year advance since a 0.5% rise last July. All in all, the component parts suggest that inflation is still very benign.
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 today’s data on retail sales, the nation’s stubbornly high unemployment rate, and still far-from-impressive gains in 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 gives it the flexibility to continue its monetary policies, which includes an aggressive bond-buying program to support economic growth.
The latest wholesale pricing data offered no surprises, which in the eyes of the Federal Reserve has to be welcome news at this juncture. The tame inflationary pressures will allow the lead bank to continue its aggressive monetary easing policies to keep the economy moving forward, even if still at a rather pedestrian pace. We will get more insight on inflation next week when the Labor Department releases its companion report on consumer prices next Tuesday. Next week will also bring data on housing starts and building permits, industrial production, as well as the Federal Reserve’s latest Beige Book summation of economic conditions.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.