 | The Producer Price Index Dropped 0.5% in September |
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| Posted Under: Data Watch • PPI |
Implications: No two ways about it, producer prices plunged in September. The 0.5% monthly decline was the largest single-month drop since January, and the second largest monthly decline in the series going back to late 2009. That said, roughly two-thirds of the drop can be attributed to a 5.9% decline in energy prices. Also, continuing the trend we've seen with other economic indicators - think ISM reports - there is a clear difference in activity between the goods sector and the (much larger) service sector. While goods prices are down 5.1% from a year ago, services prices are up 1.0% and have shown acceleration in recent months, up 1.1% annualized in the past six months and 1.5% annualized in the past three months. And if you take out just energy, prices for final demand goods are up 0.6% in the past year. In other words, once energy prices stabilize, producer prices will start to move higher. The Fed has reiterated that falling energy prices are a transitory factor. So, in theory, these declines should not play a significant role when they decide whether to raise rates later this year. Core producer prices, which take out both the volatile food and energy components, declined 0.3% in September but are up 0.8% in the past year. In other words, we are not in a persistent deflationary environment. We'd like to see the Fed raise rates and think a rate hike in December remains possible. Holding short-term rates near zero distorts the nature and timing of economic and financial activity and our economy will eventually pay a price for that. Once energy prices stop falling, overall consumer inflation measures will hit the Fed's 2% target within a year. However, right now, the market expects the Fed to hold off on the first rate hike until March and today's report gives the Fed plenty of ammunition to meet this expectation.
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