Strategic Briefing | 3.17.2011 | Producer Price Inflation

U.S. producer prices surge in February
RBC | Mar 16
February producer prices rose a much stronger than expected 1.6% in the month following a 0.8% rise in January. Expectations had been for a sizeable increase although by a more moderate 0.7%. The strong monthly increase resulted in the year-over-year rate jumping to 5.6% from 3.6% in January. On a core basis, prices rose an expected 0.2% although this was sufficient enough to move the annual rate up to 1.8% from 1.6% in January and a recent quarterly low of 0.9% at the end of 2009.
Wholesale prices up 1.6% on steep rise in food
LA Times | Mar 16
David Resler, an economist at Nomura Securities, said the jump in prices is likely temporary, echoing remarks made by the Federal Reserve on Tuesday. Much of the increase in food prices was due to winter freezes in Florida, Texas and other agricultural areas, Resler said. Turmoil in the Middle East is a major reason that motorists are facing higher gas prices. “Both food and gasoline prices are going to stop rising so rapidly,” Resler said. But John Ryding, an economist at RDQ Economics, disagreed, noting that consumers will feel the impact for some time. “We do not buy the Fed’s reassurance that these pressures will be temporary and we believe the public, seeing these strong increases in food and energy … will not be marking back down their inflation expectations,” Ryding said.

Inflation pressure bubbles, home building dives
Reuters | Mar 16
Economists said the jump in food and energy costs that drove the U.S. producer price index higher last month would likely steal from other spending and slow growth. “I don’t believe that this is a general rise in prices across the board, it’s not the stuff of an inflationary spiral, but you are starting to have some pricing pressures,” said Brian Levitt, an economist at OppenheimerFunds in New York.
Market Commentary
MorganKeegan | Mar 16
The bigger surprise to the market came from this morning’s PPI report. During the month of February, the Producer Price Index increased by 1.6%, which is quite a bit higher than the 0.7% widely expected. On a year-over-year basis, this translates to an increase of 5.6% against expectations for an increase closer to 4.7%. The “silver lining” of the report is that “core” producer-level inflation came in more or less as expected with a monthly increase of 0.2% and a year-over-year increase of 1.8%. This leaves us with a couple of questions to ponder: (1) will producer-level inflation spill over to consumer prices, and (2) how much longer can we credibly argue that energy and food inflation don’t really “count”? Tomorrow’s CPI report should provide some clues about the first question, but only time will tell if the investment community eventually abandons the practice of ignoring food and energy prices when thinking about inflation.
U.S. Producer Prices Jump Amid Higher Food And Energy Prices
RTT News | Mar 16
Paul Ashworth, Chief U.S. Economist at Capital Economics: “We have been warning for some time that the 85 percent surge in agricultural commodity prices since last summer would eventually feed through into the PPI and CPI and here it is. There is plenty more to come over the next few months, although agricultural commodity prices have fallen back quite sharply over the past couple of weeks,” he added.
United States: Producer Price Index
Moody’s Analytics/Dismal Scientist | Mar 16
Excluding food and energy, core prices for finished goods rose 0.2% in February. Prices for core intermediate and crude goods were also higher in February. Rising prices at all stages of production indicate improved strength in the recovery. Moreover, faster price inflation at earlier stages of production is beginning to put modest upward pressure on the core index, a trend that will continue in the months ahead.
Producer Prices Highest Since 1974
Progressive Grocer | Mar 16
February 2011 marked the largest one-month increase in 37 years for wholesale food prices, climbing by 3.9 percent. That’s according to an analysis of the latest Producer Price Index Report by the Food Institute, which indicates that wholesale prices have not experienced an increase this great in many years. This number was only exceeded in November 1974 when spiraling oil prices resulted in sharp food price increases amounting to 4.2 percent. “Food retailers in the U.S. have been very adept at holding price increases at a minimum for the past 18 months but the February surge will make that task more difficult in future months,” said Brain Todd, Food Institute president and CEO.
Rising wholesale prices ring inflation alarm bells
CNNMoney | Mar 16
“The big difference today relative to the 2008 commodity rise is that underlying demand is significantly more robust. This means that price gains are more likely to stick,” said a note from Joseph LaVorgna, chief U.S. economist for Deutsche Bank.