Implications: Given the loose stance of monetary policy, higher inflation is eventually coming, but it sure isn't here yet. Wholesale prices dropped in April by the most in three years reinforcing the signal from yesterday's report on prices for imports and exports. The main culprit behind the wholesale price drop was energy which declined 2.5% after falling 3.4% in March, helping to push overall producer prices down 0.7% in April. Energy prices are now down 13.3% at an annualized rate over the past six months. "Core" prices though, which exclude food and energy and which the Federal Reserve claims are more important than the overall number, were up 0.1% in April and are up 1.7% versus a year ago. Some analysts may suggest that with the overall PPI only up 0.6% from last year that the Federal Reserve has room for its latest round of bond buying. We think this is a mistake, and it seems like some more members of the FOMC are starting to think the same thing. Core inflation is likely to continue growing and, despite projections of bumper US crop yields, food inflation should continue moving upward given recent improvement in emerging economies. Monetary policy is loose enough already. The problems that ail the economy are fiscal and regulatory, not monetary. Adding even more excess reserves to the banking system is not going to boost economic growth. Yesterday's inflation report showed import prices declined 0.5% in April and are down 2.6% from a year ago. Most of the decline is due to oil; excluding petroleum, import prices were down 0.1% in April and are down 0.3% in the past year. Export prices fell 0.7% in April and are down 0.9% in the past year. Farm exports were down 0.5% in April and are down 1.5% versus a year ago.
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