November's 0.8% Producer Price Rise Aids the Deflation Fight
Why is a little inflation at the wholesale level beneficial? It means deflation hasn't taken hold in the U.S., despite the substantially smaller workforce and globalization's cost-cutting impact.
Deflation -- a period of sustained price declines -- robs companies of revenue and can lead to a recession, or even worse. The Fed wants the economy to exhibit some inflation, as long as it remains low, because a little inflation helps maintain the price support companies need to reap the benefits from increased sales, while not cutting into purchasing power.
The core producer price index, which excludes often-volatile food and energy prices, rose 0.3% in November.
A Bloomberg survey had expected both top-line producer prices to increase 0.7% and the core rate to rise 0.3% in November, after an 0.4% rise and a 0.6% decline in October, respectively. Producers prices rose 0.4% and 0.5% in September and August, respectively.
Year-Over-Year Core Inflation Is Still Low
Still, although the economy is showing signs of a slight increase inflation at the producer level, much of it is concentrated in food and energy. During for the past 12 months, wholesale inflation has increased 3.5%, lower than the 4.3% year-over-year rate recorded in October. Wholesale prices rose 4.4% in 2009 and 0.9% in 2008.
However, take away the food and energy component, and much of the past 12 months' inflation disappears. Core producer prices -- closely monitored by the U.S. Federal Reserve -- have risen just 1.2% in the past year. That's lower than the 1.5% year-over-year core rate recorded in October and at the bottom end of the Fed's "comfort zone" for inflation.
In November, finished energy prices rose 2.1%, with much of that stemming from a 4.7% jump in gasoline. Food prices increased 1%, feed stuff rose 1.9%, finished goods (excluding food) were up 0.7%, intermediate goods rose 1.1% and materials for further processing increased 0.6%.
That said, the struggle to prevent deflation is hardly over. Core producer prices are up just 1.2% in the past 12 months, and that's just about as low as the Fed wants this measure to go. Given the risk of further price declines, the central bank will likely have to maintain its quantitative easing program well into the winter.