Rising Energy Costs Helps Producer Price Index Climb the Most Since June

Andrew Klips |

U.S. wholesale prices in December rose the most in six months, led by an increase in energy prices, according to the latest Producer Price Index report released Wednesday by the Bureau of Labor Statistics.

The headline PPI for finished goods, which reflects prices received by farms, refineries and factories, rose a seasonally adjusted 0.4 percent last month compared to December 2012, after declining by 0.1 percent in November and 0.2 percent in October. Economists anticipated the 0.4-percent increase. The rise was the third largest of 2013, lagging only a 0.6-percent increase June and 0.7-percent rise in February.

Pacing the gains was a 1.6-percent jump in finished energy goods, representing the largest one-month hike in prices since a 2.5-percent rise in June 2013. The majority of the increase was attributable to a 2.2-percent jump in the gasoline index. Prices were also up for diesel fuel and home heating oil.  

Paring the gains was a 0.6-percent drop in the food index, led by a 13.4-percent decline in prices for fresh and dry vegetables and a 6.8-percent drop in finfish and shellfish.

Stripping out the volatile food and energy categories, so-called “core” PPI rose 0.3 percent in December, marking the biggest advance since a 0.5-percent increase in July 2012. Economists were only expecting a rise of 0.1 percent for December.  Almost half of the climb was because of a 3.6-percent increase in prices for tobacco products, which was the biggest surge in prices since 2007. Higher prices for passenger cars (+0.2%) and light trucks (+0.5%) also contributed to the advance.

For all of 2013, core PPI only rose a tepid 1.4 percent, the smallest gain for a calendar year since the Great Recession was in high gear in 2008.

Investors, as well as the U.S. Federal Reserve, pay attention to the PPI as a barometer of inflation. The index measures the average change in selling prices received for finished goods over time. If wholesalers have to pay more, the costs may subsequently be passed on to retailers, who then pass it on to consumers. As such, the PPI can be a leading indicator for consumer inflation, as measured by the Consumer Price Index, which is scheduled to be released on Thursday at 8:30 am.  

Benign inflation gives the Federal Reserve wiggle room in maintaining ultra-low interest rates.  It also allows the Fed to move slowly with tapering the massive stimulus plan called QE3 that was just this month shifted down by $10 billion to $75 billion in monthly purchases of Treasuries and mortgage-backed securities meant to stimulate the economy.

Separately, a report delivered by the Federal Reserve on Wednesday showed that factory activity in the mid-Atlantic region is surging in January.  The main bank’s Empire State Manufacturing Index, which canvases manufacturers in New York, southern Connecticut and northern New Jersey, rose to 12.5 in January from 2.22 in December.  Readings above zero indicated expansion, while below signal contraction in manufacturing in the region. January’s figure is the highest since May 2012 and blew past economist predictions of 3.75.

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