Econoday Economic Report: Producer Price Index February 19, 2009

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Producer Price Index

Released On 2/19/2009 8:30:00 AM For Jan, 2009

	Prior	Consensus	Consensus Range	Actual
PPI - M/M change	-1.9 %	0.2 %	-1.1 % to 2.0 %	0.8 %
PPI -Yr/Yr change	-1.2 %	-2.1 %	-3.4 % to -0.5 %	-1.3 %
PPI less food & energy - M/M change	0.2 %	0.1 %	-0.4 % to 0.6 %	0.4 %
PPI less food & energy - Yr/Yr change	4.3 %	3.8 %	3.4 % to 4.3 %	4.2 %

Highlights
The deflation mongers were quieted this morning as producer price inflation in January jumped sharply, both at the headline and core levels. The overall PPI rebounded 0.8 percent, following a 1.9 percent fall in January. The January rise was well above the consensus forecast for a 0.2 percent gain in the headline PPI. The core PPI rate surged 0.4 percent after a 0.2 percent increase the month before. The market had projected a 0.1 percent rise for January. For the latest month, headline inflation was pumped up by a jump in energy which increased 3.7 percent after a 9.1 percent fall in December. Food actually fell 0.4 percent in the latest month.

The 0.4 percent spike in the core rate was led by some well known and not so well known volatile subcomponents. Starting with the latter, the index for toys, sporting goods, and small arms turned up 4.4 percent after falling 0.8 percent in December. Bet you didn’t even know this subcomponent even existed. Also, pharmaceuticals jumped 1.1 percent while tobacco spiked 0.6 percent. Pharmaceuticals can be sporadic as price changes by drug companies can be infrequent and lumpy. Changes in tobacco prices also can be sporadic and difficult to seasonally adjust. Prices for light trucks increased 0.5 percent and may be coming off earlier discounting.

For the overall PPI, the year-on-year rate dipped to minus 1.3 percent in January from down 1.2 percent the month before (seasonally adjusted). The core rate eased to up 4.2 percent from up 4.3 percent in November.

Overall, today’s PPI report indicates that price pressures have not gone away. However, based on the subcomponents underlying the core jump, the January number likely overstates any new trend. But bond yields rose on the news and equity futures slipped.

Market Consensus before announcement
The producer price index in December continued its streak of energy induced monthly declines. The overall PPI fell 1.9 percent, following a 2.2 percent drop in November. Meanwhile, the core PPI rate rose 0.2 percent after edging up 0.1 percent in November. As in recent months, energy led the headline PPI down. For the latest month energy dropped 9.3 percent, led by a 25.7 percent plunge in gasoline prices. Even food was weak with a 1.5 percent decline. The core rate was moderate despite a 1.2 percent rebound in passenger car prices and a 0.8 percent boost in light truck prices. Within the core, weakness was largely in capital equipment outside of light trucks.

PPI Consensus Forecast for January 09, m/m: +0.2 percent
Range: -1.1 to +2.0 percent

PPI Consensus Forecast for January 09, y/y: -2.1 percent
Range: -3.4 to -0.5 percent

PPI ex food & energy Consensus Forecast for January 09, m/m: +0.1 percent
Range: -0.4 to +0.6 percent

PPI ex food & energy Consensus Forecast for January 09, y/y: +3.8 percent
Range: +3.4 to +4.3 percent

Definition
The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measure the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. The headline PPI (for finished goods) is a measure of the average price level for a fixed basket of capital and consumer goods for prices received by producers. Why Investors Care

It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations.
Data Source: Haver Analytics

Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI.
Data Source: Haver Analytics

2009 Release Schedule

Released On: 1/15 2/19 3/17 4/14 5/14 6/16 7/14 8/18 9/15 10/20 11/17 12/15

Release For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov