Implications: After three months of declines, the Producer Price Index (PPI) moved noticeably higher to end 2013. The rise in December was led by energy, with gasoline prices accounting for more than the half gain for the month. "Core" prices, which exclude food and energy and which the Federal Reserve follows more closely than the overall number, were up 0.3% in December, the largest single-month jump since July of 2012. Despite the outsized increase in December, producer prices are up 1.2% in the past year. "Core" producer prices are up 1.4% from a year ago, faster than the overall gain but not fast by the standards of the past several decades. As a result, some analysts will say the Federal Reserve has room to continue quantitative easing at the current pace of $75 billion per month or only "taper" by $10 billion per meeting. We think this would be a mistake. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Today's producer price report does not signal the onset of hyperinflation, but it does support the case for inflation moving higher more rapidly than the Fed now expects. In other news this morning, the Empire State index, a measure of factory sentiment in New York, rose to +12.5 in December from +2.2 in November, the highest reading for the survey since May of 2012. The report supports our outlook for faster economic growth in 2014.
Click here for a PDF version
|