Falling Energy Prices Push Producer Price Index to Third Straight Monthly Decline

Andrew Klips  |

Gas prices in the United States continued on the downward trend in November, weighing on the headline producer price index, according to a report on Friday from the Labor Department.

The index for finished goods, which measure prices paid to factories, refineries and farms for products, declined by a seasonally adjusted 0.1 percent from October against economist calls for a flat month. Energy prices led the laggards with a drop of 0.4 percent month-over-month, following a 1.5-percent drop the month earlier. In October, the PPI contracted by 0.2 percent and in September it fell by 0.1 percent after registering four straight months of gains.

Anemic Wholesale Prices

In the past year, the PPI has declined six times to only average just over a 0.1-percent gain per month. Minimal gains in wholesale prices suggest that inflation is going to remain benign in the U.S. Compared to last November; the PPI is up 0.7 percent.

Wholesale food prices were flat in November after rising by 0.8 percent in October. In November, higher prices for pork were offset by the biggest drop in almost three year in prices for processed young chickens.

So-called “core” PPI, which excludes the volatile energy and food categories, rose by 0.1 percent, in line with economist predictions.

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Crude and Intermediate Goods Struggle

At earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.5 percent. The prices for intermediate goods, which include things like stamped steel for automobiles, have contracted in five of the past 12 months, including a 0.4-percent decline in October. The declines were broad with drops in prices for intermediate energy (-1.5%) and foods and feeds (-0.9%). The “core” index was down 0.1 percent, led by a 2-percent drop in prices for basic organic chemicals.

Prices for crude goods, which are raw materials making their entry into the markets, sank 2.6 percent, the biggest one-month decline in more than a year, after dropping 0.9 percent in October. Raw energy again led the way, plunging 6.6 percent. Prices for raw materials have now fallen in six out of the past nine months.  Prices for core crude goods, excluding energy and food, advanced by 1.4 percent, led by a 6-percent rise in prices for carbon steel scrap and also helped by higher prices for gold ores. These extremely low prices for raw materials suggest that there shouldn’t be any stark rises in prices for finished goods in the foreseeable future.

Fed Stimulus and the Riddle of Inflation

The low prices across the board and lack of inflation is an enigma considering the massive stimulus package by the Federal Reserve, which should be taking inflation higher. The low inflation could present an issue to the main bank as it continues discussion about curtailing the $85 billion it spends every month buying assets to try and spark the economy. The Fed meets again next week on Tuesday and Wednesday, a meeting much anticipated by Wall Street as it looks for more concrete details on the tapering of the Fed’s stimulus plan. Some economists think tapering could begin this month, while others believe the Fed will begin ratcheting down its asset purchases early in 2014.

Stocks are moving higher on Friday after a three straight red closes as traders take a cautious approach ahead of the FOMC meeting. The Dow is up 34 points, the S&P 500 is up 2 points and the Nasdaq has risen 7 points, although all three indexes are heading for a weekly loss around 1.5 percent.

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