Inflation still alive and well at the producer level

Producer prices rose 4.3% in the 12 months ending in October. Measured over the past 3 years—to eliminate the extreme volatility of 2008—producer prices are up at a 2.4% annual rate. Excluding food and energy prices, the producer price index is up 1.4% in the past year, and over the past three years, it's up at an annual rate of 2.2%. No sign of deflation here, and if anything I detect a gentle upward bias in the pace of producer inflation since 2003, which not coincidentally was when the Fed first began to adopt an aggressive accommodative policy stance.

You may see reports that highlight the fact that the rise in producer prices in October was much less than expected, but that needs to be taken with a grain of salt. As Brian Wesbury notes, the unexpectedly small gain in October prices (and the unexpectedly large drop in core prices) was likely due to a seasonal adjustment problem, since "this is the fourth time in the past six years that the core PPI has dropped in October ... and (it) may be due to how the government estimates prices of light trucks, which fell 4.3% in October."

Manufacturing output continues to expand

US October Industrial Production was unchanged, according to the Federal Reserve, disappointing market expectations of a 0.3% increase. This weakness, however, was mostly due to unusually mild weather which caused utility output to drop 3.4%. The above chart shows the index for manufacturing activity (a subset of the larger industrial production index), which rose 0.6% in October and is up 6.2% in the past year. Over the past six months, manufacturing activity has expanded at a 4.5% annual rate—no sign of any significant slowdown or double-dip here. I note that the rebound in manufacturing activity following the 2008-09 recession has been much stronger than the rebound following the 2001 recession, even though activity is still about 9% below its late 2007 peak. We've got a ways to go before breaking new high ground, but we're making progress at a decent rate.

A new direction for fiscal policy

This is impressive, and augurs well for real change in Congress.

(Today) Senate minority leader Mitch McConnell endorsed the proposed earmark moratorium that the GOP Senate caucus will vote on tomorrow:

Nearly every day that the Senate’s been in session for the past two years, I have come down to this spot and said that Democrats are ignoring the wishes of the American people. When it comes to earmarks, I won’t be guilty of the same thing. 

Make no mistake. I know the good that has come from the projects I have helped support throughout my state. I don’t apologize for them. But there is simply no doubt that the abuse of this practice has caused Americans to view it as a symbol of the waste and the out-of-control spending that every Republican in Washington is determined to fight. And unless people like me show the American people that we’re willing to follow through on small or even symbolic things, we risk losing them on our broader efforts to cut spending and rein in government. 

That’s why today I am announcing that I will join the Republican Leadership in the House in support of a moratorium on earmarks in the 112th Congress.

UPDATE: Even the Democrats are getting the message: Democrat Senator Mark Udall (OH) today called "for an end to the wasteful and influence-laden process of earmarking."

HT: Glenn Reynolds