Inflationary Pressures Seen but Manufacturing Showing Strength

Today’s Producer Price Index report confirmed inflationary pressures from energy, particularly gasoline, in the month of January.

Today’s report indicates that there are pockets of inflation despite the sluggish recovery. But if economic growth remains soft and if the Fed does unwind its balance sheet expansion in a timely manner, the pockets of inflation likely will not spread. But those are big ifs.

Producer prices jumped unexpectedly last month: the overall PPI jumped 1.4 percent after rising 0.4 percent in December. Energy costs accounted for much of the increase, rising 5.1 percent with gasoline up 11.5 percent, The core PPI also increased by 0.3 percent after a flat reading in December.

First-time jobless claims also rose to a higher-than-expected 473,000 for the week of Feb 13 but the 4-week average remained steady, indicating labor market conditions are continuing a trend established in late December but still relatively weak.

Leading indicators for January showed modest economic growth, according to today’s report compiled by the Conference Board, led by improvements in financial markets and manufacturing. The index increased to 0.3 percent in January following higher than 1 percent gains in both December and November.

According to Ken Goldstein, economist at The Conference Board: “The cumulative change in the U.S. LEI over the past six months has been a strong 9.8 percent, annualized. This signals continued economic recovery at least through the spring.”

And the Philadelphia Fed Survey business outlook survey index for Feb showed accelerating month-to-month growth, notably for new orders, coming in at 22.7 vs. January’s reading of 3.2. Shipments also rose, coming in at 19.7 vs. 11.0 in January. Also significant, inventories increased for the first time since October 2007 despite shipment drawdowns.