Producer prices jump 1.8% in November on energy prices

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Producer prices unexpectedly surged 1.8% in November, the U.S. Labor Department announced Tuesday, as a jump in energy prices pushed the wholesale index higher. Further, excluding the often-volatile food and energy component, "core" producer prices rose 0.5%.

A Bloomberg News economists survey had expected producer prices to increase 1% in November after rising 0.3% in October and falling 0.6% in September. Economists also had expected the core rate to tick up 0.2% in November after slipping 0.6% in October and 0.1% in September.

Separately, the Empire State Manufacturing Index revealed a considerable decline in manufacturing activity in the New York region this month. After four months of improvement, the index fell 21 points to 2.55 in December from 23.51 in November, the New York Federal Reserve announced Tuesday.

Full-Year PPI Edges Up

On the price front, inflation at the wholesale level has trended modestly higher in the past year, rising 2.4% in the past 12 months, with the core rate rising 1.2%. In prior months, the 12-month top-line PPI rate had been negative, indicating price declines. In the past year the core rate has risen just 1.2% -- or within the U.S. Federal Reserve's comfort zone for inflation.

In November, one can see the skew affect of higher energy prices: Finished energy goods surged 6.9% higher, with gasoline prices rocketing 14.2% higher. Intermediate energy goods jumped 5.4%.

Other producer price category changes were as follows: durable goods rose 0.6%, materials/components for manufacturing increased 0.8%, capital equipment increased 0.4%, finished goods jumped 1.8%, construction materials fell 0.2%, and manufacturing supplies declined 0.3%.

Business executives, economists and in particular Fed officials closely monitor the PPI because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core PPI statistic to gauge business costs.

Economic Analysis

The 1.8% rise in the top-line PPI is a surprise, but a lot of it is what economists call "noise." In November, energy prices, food prices and some higher auto prices distorted by the "cash-for-clunkers" program skewed the index higher. Assuming energy prices moderate in the months ahead, the broader fundamentals (low capacity utilization, no wage pressure) should keep inflation tame at the wholesale level.

Bottom Line: The U.S. economy is looking at decent GDP growth with low inflation in the year ahead.

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