February Producer Prices

The Bureau of Labor Statistics (BLS) reported that wholesale prices rose a strong 0.4% in February.  Referred to as the Producer Price Index (PPI), this measure helps provide an early warning of future inflation since producers can be expected to at least try to push their rising costs through to the final consumer.  While this monthly increase is rather hefty, the year-over-year rate of increase fell from January’s 4.1% to 3.3% in February.  Since these numbers are not seasonally adjusted, they give us a truer sense of current prices pressures and despite the monthly decline this level is definitely higher than what the Federal Reserve would like to see.

The primary culprit driving costs higher in February was energy (up 1.3%, offsetting a 0.5% January drop), especially gasoline which climbed 4.3% on the back of a 2.0% jump to begin the year.  Interestingly, food costs actually shaved off just a hair, down 0.1%, adding a bit to the 0.3% January decline.

The BLS also reports a core PPI figure which removes both energy and food costs.  The core rose 0.2% as expected and now is rising 3.0% year-over-year, the same as we saw for January.  Much of the blame here is attributable to pharmaceutical preparations with an additional kick provided by civilian aircraft.   Again, this annualized number is much higher than that level generally seen by economists as the top of the Fed’s desired range.  Should this become a trend, it suggests Bernanke and Company may find reasons to begin raising interest rates well before their recently announced estimate of late 2014.