March Producer Prices

Expectations for the March headline producer prices index (PPI) indicated a full one percent gain.  According to the Labor Department it came in at a lower 0.7% increase, still high but well off the boiling point 1.6% level we saw in February.  The year-over-year rate slipped, but barely, off one-tenth to a worrisome +5.7%, well above anything the Fed wants to see.  The core rate, which subtracts food and energy, was up 0.3% in March, rising 2.0% year-over-year and hitting what many consider to be the top end of the Federal Reserve’s comfort zone.

The rapid rise we are seeing in prices can be attributed in large part to energy costs.  No surprise there.  These were up 2.6% in March on the back of February’s 3.3% rise.  Individually we felt the impact as gas prices at the pump soared 5.7%, a full two percent higher than the previous month.  For those in colder climes a 2.7% jump in heating oil prices just added to the misery.  Food was actually off 0.2%, but with the 3.9% jump in February the drop doesn’t seem to be very apparent when I go shopping.  If you happen to be looking for anything which comes in a small blue box, prepare yourself for sticker shock; the jewelry, platinum and karat gold category gained another 3.7% after February’s 4.6% climb.

Ben Bernanke and company are rapidly coming face to face with some very hard choices.  The second quantitative easing program (QE2) ends in June.  Many in (and outside) government consider this program tantamount to printing money and therefore it must share a large part of the responsibility for rising inflation.  On the other hand, many fear allowing it to expire without being replaced by QE3 will remove that stimulus upon which our current fragile economic recovery relies.  Their final decision will be tough and all of us must live with the consequences.