The Fed tells me not to worry about it. For some reason I take little comfort in that.
There has been a bunch of heated debate out there on the topic. Rather than talking about simply the numbers as a whole, I prefer to talk about portions of it also as IMO some of their effects weigh more than others.
Here is the headline:
The Producer Price Index for Finished Goods rose 0.7 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed a 0.6-percent decline in February and a 1.4-percent increase in January. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 0.6 percent in March and the crude goods index rose 3.2 percent. On an unadjusted basis, prices for finished goods advanced 6.0 percent for the 12 months ended March 2010, their largest year-over-year gain since an 8.8-percent rise in September 2008.
Here is is visually (click to enlarge):
What is the concern? Here (click to enlarge):
Food and energy are items that are simply not discretionary. People can cut back, but they cannot eliminate them. The broader economic impact of that action is felt almost immediately. The rapid rise in these items is concerning as it directly sucks capital out of consumers hands and is a direct drain on discretionary funds.
Now, if we look at the first half of the chart we see a near year of declines. The recent rise could simply be a return to normal conditions, that could be debated. The problem is, after unprecedented Federal stimulus, it could also be the beginning of something more insipid. While there isn’t a reason to panic now, a steady up trend since November means we do need to perhaps begin to wonder why those who claim inflation will not be an issue seem so confident in their stance.
Either way this can get very bad. Firms can pass these costs onto consumers OR they can’t in which case growth and job creation slows or retraces. After 5 straight months of increases, one has to begin to look at the data perhaps a bit worried especially when the “no inflation” case was made using the same data when it was falling. We can’t use data to support our case and then ignore the same data when it begins to move against us.
My concern is that we are seeing both continued increases and it seems the rate of increase is picking up also. My biggest concern is that policy makers are at least publicly dismissing the data. Based on how far behind the curve they have been in recent years, my fear is inflation begins to rage before they act.
Be clear I am not ringing panic bells but I am saying inflation is not a friend. It is also a painful genie to put back in the bottle when it gets out. I just get uncomfortable when I see what I think is the beginning of something happening and people are telling me it isn’t.
Full Report:
PPI 4/2010