Producer Prices Reach 8-Month High

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Is the Fed's new asset purchase program already succeeding in raising inflation? Looking at the latest producer price index (PPI) data implies that it could be. The prices for finished goods that producers face increased by 0.8% in November, according to the Bureau of Labor Statistics. That's the biggest increase since March. Is inflation rising, or is this just a blip?

First, here's the chart of PPI for finished goods:

ppi 2010-11.png

Since August, there certainly doesn't seem to be much deflationary threat here. The 12-month change in PPI for finished goods is 3.5% as of November.

So what's driving the increase in prices? Food and energy make up a significant influence. Food prices rose by 1.0%, and energy prices were up 2.1%. You have probably noticed the latter driving an increase in prices at the pump. If you exclude those two factors, core PPI for finished goods rose by 0.3%. Here's its chart:

ppi core 2010-11.png

After taking a dive last month, core PPI in November matched the highest value it's hit all year. This shows that it isn't only food and energy driving inflation.

Other measures of PPI also increased in November. Intermediate goods and crude goods both saw their prices rise by 1.1% and 0.6%, respectively.

At this point, it's too early to tell the effect that PPI will have on the prices consumers face. Generally, there's some correlation. It is possible, however, that producers will bear some or all of the cost increase if prices are too sticky to absorb the entire rise. They may fear that sales will decline if they increase their prices. If that's the case, then the Fed's efforts could simply manage to lower profits for firms who might have used that money for growth or hiring.

This all assumes that prices will continue to increase at a more moderate rate than they had over the past year. Although inflation rose for producers in November, we'll need a few more months of data before we can really say that a trend is forming. But last month's results begin to imply that the Fed's program may be working to increase prices.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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