December Bucks Disinflation Trend as Price Pressures Increase

Plant Money


December appears to have bucked the disinflationary trend. The U.S. Bureau of Labor Statistics reports that producer prices, a leading indicator of inflation, increased 0.4 percent on the month and 1.2 percent on the year in December, the highest sequential growth rate since June and the first month of positive growth since September.

The PPI interprets price changes from the perspective of the seller and can be used as a leading indicator of inflation because it measures input price pressure. While popular indexes of prices such as the Consumer Price Index and the Personal Consumptions Expenditures Price Index measure the change in prices that consumers pay for goods they buy, the PPI measures the change in prices that the sellers and retailers of those goods pay to wholesalers and producers.

The producer price index report is broken down into three broad sections: crude goods, intermediate goods, and finished goods. The finished goods component is closest to the consumer, and the crude goods component is farthest away. Price increases at any stage of production can sometimes be passed down the line and could ultimately reach the consumer, as reflected in CPI and the PCEPI.

Falling energy prices have been the primary downward pressure on overall prices this year at the producer level and, to a large degree, at the consumer level as well, but finished goods energy prices jumped 1.6 percent in December. Foods prices at the producer level contracted 0.6 percent in December. Excluding these two categories — yielding a core, or less volatile measure of producer price movement — prices increased 0.3 percent in December, the highest sequential increase in at least a year.

Moving down the pipeline, the price index for intermediate goods — or the stage of processing index, which represents ready-to-use materials like steel and lumber — increased 0.6 percent, which follows two months of price contraction. The price for intermediate foods goods increased 0.4 percent, while the price for intermediate energy goods increased 0.9 percent. Excluding food and energy, intermediate goods prices increased 0.2 percent on the month.

Crude goods prices increased 2.4 percent sequentially, which also follows two months of price contraction. Crude foods prices fell 0.3 percent, while crude energy prices increased 6.2 percent, driving the majority of the increase. Core goods prices increased 0.6 percent in December.

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