March Producer Prices

The costs paid by manufacturers and wholesalers for finished goods did not change in March after climbing 0.4 percent in February according to the Bureau of Labor Statistics’ (BLS) latest release of the Producer Price Index (PPI).  Year-over-year, there has been an increase of 2.8 percent which is a slower rate of change from a month ago when it was 3.3 percent. Producer prices appear to have put in a peak in their yearly percent changes back in July 2011 when the non-seasonally adjusted count was 7.1 percent.

This indicator includes volatile components like food and energy, so it is constructive to look at core PPI which excludes these fickle components.  Core PPI increased 0.3 percent in March after ticking up 0.2 percent in February.  Looking at the year-over-year change in core shows a trend that is much less dramatic than the fall off seen in the headline figure.  Year-over-year, the change in core prices remained the same as February at 2.9 percent.  This is only slightly off of the recent 3.0 percent peak that occurred in November, December, and January.

Being able to see the different stages of manufacturing is one advantage of the producer price index.  When looking at the intermediate stage of production (if bread is a finished product, flour would be an intermediate good) there has been 0.7 percent increases in each of the last two months.  This may seem steep, but it was increasing at 1.2 percent a year ago, and the trend of the year-over-year change has been steadily down to its current reading 2.9 percent after peaking at 11.5 percent in July 2011. Looking further down the pike, we can see prices of raw goods (think wheat) contracting by 2.5 percent in March, and the year-over-year change virtually disappearing as it read 0.1 percent.  To put this in perspective, the year-over-year change was 26.1 percent in June 2011.

This slowing trend may very well be why the Federal Reserve is not overly concerned about the accommodative policy it is currently administering.  If the pipeline of inflation is suggesting a lower growth rate, Ben Bernanke and his cohorts can concentrate on their second mandate, the election jobs market.  (by C. Cox)