Inflation Expectations Hold Steady As Producer Prices Flounder

Plant Money

Source: http://www.flickr.com/photos/76657755@N04/

When Federal Reserve Chairman Ben Bernanke testified before Congress in May, he gave what could be interpreted as a mixed diagnosis of the health of the U.S. economy. While economic growth during the first and second quarter continued at a moderate rate, the trajectory of key indicators like unemployment and inflation are by no means clear.

The U.S. Bureau of Labor Statistics reported on Friday that its producer price index for finished goods climbed a seasonally adjusted 0.3 percent on the month in August, ahead of expectations for an increase of 0.2 percent. Headline produce prices are up 1.4 percent on the year. Excluding food and energy, producer prices were flat on the month and up 1.2 percent on the year.

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. The producer price index report is broken down into three broad sections: crude goods, intermediate goods, and finished goods.

Price increases at any stage of production can sometimes be passed down the line and could ultimately reach the consumer, as reflected in consumer price index and the index for personal consumption expenditures.

Crude goods prices declined 2.7 percent on the month in August. For the three months ended August, crude goods prices are down 1.4 percent, generally led by declines in the prices for crude energy materials and food and feedstuffs. Intermediate goods prices were once again flat on the month. One subcomponent worth looking at is jet fuel, which climbed 4.5 percent on the month.

As noted, the headline price index for finished goods increased 0.3 percent on the month, and was flat excluding changes in food and energy prices.

PPI

Source: Data from the U.S. Bureau of Labor Statistics

Producer price inflation may be soft, but headline inflation expectations are still targeting about 2 percent. PCE inflation expectations compiled from U.S. Federal Reserve policymakers call for a headline rate of 2 percent by 2015, with a slightly lower core rate.

FOMC-PCE

Source: U.S. Federal Reserve

With its most recent business inflation expectations survey, the Federal Reserve Bank of Atlanta reported that businesses expect unit costs to increase 2 percent over the next 12 months, “roughly in line with the recent year-ahead inflation forecasts of private economists.” Uncertainty over future price movement declined, with most businesses agreeing that there will be upward pressure on prices over the next year.

Atlanta Inflation

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