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What to Watch in Tuesday's Producer Price Data

Written by LNC

Tuesday, 20 May 2008

What to Watch in Tuesday’s Producer Price Data
By Peter Morici

Tuesday the Labor Department will issue April data for the Producer Price Index. The consensus forecast is for a 0.4 percent increase in the headline number and a 0.2 percent increase in the core index—the increase in producer prices with energy and food prices removed. In March, the headline index rose 1.1 percent and the core increased 0.2 percent.

Producer price data are a leading indicator of where consumer prices will go, and rising energy and food prices may be expected to keep headline indexes for both producer and consumer prices rising through the fall.

Rising gasoline, diesel and utilities prices are driving up prices for producers as well as consumers; however, motor fuel prices tend to rise in the spring. Hence, the seasonally adjusted increase in the energy component should be much more moderate than the observed surge in pump prices for gasoline and diesel.

Nevertheless, the seasonally adjusted energy index should trend upward through the summer even as observed pump prices peak. The full brunt of rising oil prices have not been felt by utilities—both electric and natural gas. Utilities will be asking regulatory commissions for large rate increases, and those will be reflected in producer and then consumer price data through the fall.

Meanwhile the ethanol program continues to increase prices for corn and competing grains at home and abroad, causing shortages and rationing in developing countries and rising prices for grain derivative products—flour, baked goods, meat, dairy, and processed foods containing corn syrup and soy. The president’s proposals for non-food based ethanol derivatives are like General Motor’s ads about electric cars. Those benefits, if they ever arrive, are well into the future.

Tomorrow look in the data for the following:

The energy index should rise less than one percent or could even ease back a bit According to the Department of Energy gasoline and diesel prices were up 6.1 and 5.2 percent respectively but those data do not reflect seasonal pressures. Adjusted for seasonal factors, motor fuel prices may have risen less than two percentage points in April. Also, DOE and Labor Department data do not always coincide because of timing issues in monthly observations, and the DOE publishes its readings much earlier.

Consumer food prices are expected to rise 4 to 5 percent annually or about 0.4 percent a month, and producer prices a bit quicker than that, thanks to the pass through effects of the ethanol program and rising demand for grains in China and other fast growing developing-country economies. For food prices, any reading less than 0.5 percent a month is good.

To dig deeper, look at Table 2 for gasoline, home heating oil and electricity and natural gas prices for the pass through of higher global oil prices on domestic energy markets. Similarly, examine seasonally adjusted changes in eggs, bakery products, pasta, beef, pork, chickens, dairy, confectionary products, and cooking oil, as well as flour, refined sugar, confectionary materials and animal feeds. These categories provide an indication of the pass through effects of the ethanol program and push of higher energy prices generally.

In Table 2, also look for the moderating effects of slack demand on apparel, motor vehicles, and various discretionary items like toys, and home electronics However, pricing pressures will continue from rising energy and commodity prices, as well as services not included in producer prices, such as health care, education, and air travel.

The core index is expected to continue rising a bit more than 2 percent a year, and that comes to 0.2 percent a month. This would pressure similar changes in core consumer prices, and Federal Reserve Chairman Bernanke would like to see those prices rise less than 2 percent annually.

With so many pressures in global markets pushing up oil and other commodity pressures, containing core inflation to 2 percent annually is a tough goal for U.S. monetary policy. U.S. interest rate policy will have virtually no impact on global oil, metal, cement, lumber, and other commodity prices. Even the U.S. domestic natural gas market has been globalized by recent breakthroughs in the technology for shipping LNG and the build out of U.S. terminals. Homeowners heating with gas will enjoy a much smaller measure of insulation from surging global petroleum prices than in the past.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.