Producer Price Index 03/21/05

Producer Price Indexes - February 2005
from Bureau of Labor Statistics

From February 2004 to February 2005, prices for finished goods rose 4.7 percent. Over the same period, the index for finished energy goods increased 11.8 percent, prices for finished goods other than foods and energy moved up 2.8 percent, and the finished consumer foods index climbed 4.9 percent. For the 12 months ended February 2005, prices for intermediate goods increased 8.4 percent, and the crude goods index rose 8.1 percent.

Bad news as Finished Goods must realign with intermediate and crude goods eventually; Producer margins cannot continue to shrink. The increase in New Home sales reported elsewhere of 9.4% in Febuary also contains dire news, as such Buying pressure will accelerate median New Home Sale pricing. The drop in Durable Goods, also reported elsewhere, was not a major element in the economy; but it indicates Business inventories may be deemed sufficient by Business leadership.

Excluding food and energy prices, the index for intermediate goods went up 0.5 percent, following a 0.8-percent gain in January

This means Inflation in intermediate goods is still far from spent, and could be over 10% year over year by June--bad number.

The Producer Price Index for Crude Materials for Further Processing declined 1.6 percent in February, following a 2.0-percent fall in January

Prices for basic industrial materials dropped 3.0 percent in February, after falling 2.5 percent in January. The copper ore index decreased 9.9 percent in February, following a 0.6-percent decrease in the prior month. The indexes for iron ore; softwood logs, bolts, and timber; and raw cotton declined, after registering gains in January

There was a extreme amount of Speculative buying in Crude Materials within the last two Quarters, and the 3.6% loss for Crude Materials may simply mean Speculative losses. It could also mean reduction in overall Production Worldwide. The later Event could curtail American Exports. It could mean foreign Producers perceive overstocked Inventories, inhibiting Import Price increases reflecting new Energy costs; this would worsen an already bad Trade balance.

Conclusion:
Inflation seems destined to rise at least 4% this Year, unless the Fed increases gradual Overnight rate increases over the next three Fed meetings. This estimate is not based on the volatility of Energy and Food, but on Business expansion of margins. The effect on the Recovery may be beneficial, if American Consumers cut down their purchases of Imports and Fuel. Inflation, nevertheless, is not fun. lgl