Prices continued their slow ascent in September on the producer level, according to the Bureau of Labor Statistics. The Producer Price Index (PPI) for finished goods rose by 0.4% last month, which matches the rise in August. This marks the third straight month producer prices have risen, after declining for the three months prior. As prices increase consistently, their stability lends little credibility to the Federal Reserve citing the risk of deflation as a reason for expansionary monetary policy.

First, it's important to stress that the data released today is for for producer prices -- not consumer prices. We'll get that on Friday. Both reports will be very important this week, as they mark the last inflation measures the Fed will receive before its November meeting where it's widely expected to begin another round of quantitative easing. If deflation looks like a threat, then that would lend fuel to the argument that monetary expansion is a good idea right now.

For producer prices, however, that doesn't seem to be the case. Let's start with a chart on PPI for finished goods:

ppi 2010-09.png

The increase in September was driven by the food prices producers face, which rose by 1.2%. Energy also rose slightly, by 0.5%. As a result, so-called "core PPI," which excludes food and energy, was lower than the overall rise in prices for finished goods. Core PPI rose by 0.1% in September, which also matched its increase in August. Here's its chart:

ppi core 2010-09.png

You can see that this measure has been extremely stable -- and extremely low -- for the past year.

Thursday's report also includes data on prices for other stages of production. Producer prices for intermediate goods also rose slightly in September, by 0.5%. PPI for crude goods, however, fell slightly, by 0.5%. That's after it rose by more than 2% in each of the prior two months.

Overall, producer prices are rising, albeit slowly. If we see a similar report for consumer prices on Friday, then it will be hard for the Fed to lean much on deflation concerns in order to justify a controversial program to expand the money supply. Instead, it will have to base the decision almost entirely on trying to lower unemployment.

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