Producer Prices Inch Higher in December

Producer prices rose just 0.2% in December, the U.S. Labor Department announced Wednesday, indicating that inflation remains inert at the wholesale level. The rise was due primarily to a jump in food prices. The core rate, which excludes the often-volatile food and energy component, was unchanged.Economists surveyed by Bloomberg News had expected producer prices to be flat in December after jumping 1.8% in November; they rose 0.3% in October. Economists also expected the core rate to rise 0.1% in December after rising 0.5% in November; core prices fell 0.6% in October.

2009 PPI: Little Price Pressure

Inflation at the wholesale level trended modestly higher in 2009, rising 4.4%, after rising 0.9% in 2008.

However, the core rate shows scant inflation: it rose just 0.9% in 2009, well within the U.S. Federal Reserve's comfort zone for inflation. In other words, take away volatile food and energy, and there was little inflation at the wholesale level in 2009.

In December, higher food prices are clear and pervasive: vegetables rose 2.8%, eggs increased 2.1%, chicken rose 4.2%, dairy products jumped 3.7%, pork surged 9.0%, and cooking oils rose 0.9%. Meanwhile, gasoline prices fell 3.2%, industrial natural gas declined 2.3%, capital equipment fell 0.1%, and finished goods excluding food dipped 0.1%.

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

Inflation Remains Low

Another tame month for inflation at the wholesale level in December, and investors can ignore the 0.2% top-line stat. As noted, higher food prices skewed the top-line stat; without it, and wholesale prices would have registered a decline for the month.

So far, despite record fiscal stimulus and quantitative easing, inflation remains low -- registering just a 0.9% core gain in 2009. At minimum, the current PPI trend will enable the U.S. Federal Reserve to maintain a low-interest-rate monetary policy to stimulate the economy for at least Q1 and probably well into Q2. At this juncture, inflation is not a threat.
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