May Producer Prices

The Bureau of Economic Analysis reported the second consecutive decline in the Producer Price Index (PPI) in May.  The decline of one percent follows April’s unexpected drop of 0.2 percent.  Once again, energy prices are the primary driver of the reduced costs.  The core PPI (which does not include energy and food) managed to match last month’s increase of 0.2 percent.  This was in line with the consensus’ expectations.

Sequential months of declines in the headline figure do not occur frequently.  The last back-to-back monthly decline happened in May and June of 2010.  Producers have been experiencing a rather abrupt slowing in price pressures.  The year-over-year change was 0.7 percent in May.  To put that into perspective, the change was 7.1 percent in May 2011 and 4.7 percent to finish last year.  A few months ago, Atlas wrote to you about the deceleration seen in the earlier stages of the manufacturing process.   At the time, crude items (think wheat) had their first negative reading in 2012.  The trend has continued, and the prices of raw materials have been dropping for three months in a row.  Intermediate goods, (think flour) have now decreased for 2 consecutive months.  As the materials continue to become less expensive, the finished goods (bread) have a better chance of seeing price easing as well.

Cost contractions continue to favor the Federal Reserve’s accommodative monetary policy.  If the indicators used to monitor prices keep suggesting disinflation, and possibly deflation, while the global economy shows signs of slowing, it seems reasonable to anticipate further assistance from Ben Bernanke and his cohorts.  As Atlas sees it, this assistance will be futile.  The banking system is flush with cash and interest rates are low.  The economy needs demand, and that cannot be artificially boosted when the largest and wealthiest segment of our population—the baby boomers–has moved past its peak spending years and the generation immediately behind it is too small to replace their spending capacity.    (by C. Cox)