Thursday, January 15, 2009

Producer Price Inflation not dead (2)

The "headline" number for producer price inflation recorded a decline of 1.9% in December and a decline of 0.9% for the year 2008. That doesn't mean inflation is dead, though, since the decline was almost entirely due to falling energy prices, and energy prices appear to be stabilizing over the past month or so. The core measure of producer prices (stripping out food and energy) rose a substantial 4.3% last year. Inflation is far from dead, but go tell that to the Treasury bond market, where widespread expectations of years of deflation still prevail. The only economic justification for Treasury yields being as low as they are is that inflation will prove to be negative for at least the next several years.


prophets said...

scott, maybe look at crude/intermediate/finished goods.

kind of shows deflation in the pipeline, so to speak... at least for the next couple months.

Scott Grannis said...

The drop in crude and intermediate prices is mainly due to the plunge in commodity prices. Finished goods are much less sensitive to commodities. There has been a little softening in the pace of growth of core finished goods prices, but over the last 4 months they are still rising at a 3.4% pace.