Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

May PPI: Still Scant Evidence of Food/Energy Price Surge Pass-Through

Economics / Inflation Jun 15, 2007 - 01:56 AM GMT

By: Paul_L_Kasriel

Economics Just like every headline economic statistic of late, the Finished-Goods All-Items PPI increased a greater-than-expected 0.9% in May after a 0.7% rise in April. As the table below shows, another sharp rise in energy prices dominated the increase in finished-goods prices. After six consecutive monthly increases, finished-food prices declined marginally.

As the Chart 1 below vividly illustrates, producer-price inflation has accelerated at the intermediate-goods and finished-goods levels. But Chart 2 shows that food-and-energy-price induced increases in producer prices are not passing through to a large extent so far to the prices of finished producer goods excluding food and energy. In the three months ended May, the "core" Finished-Goods PPI is up at an annualized rate of only 0.75% -- the lowest since September 2006. But Chart 2 does show that core intermediate-goods producer price increases have re-accelerated.

There appears to be about a four-month lag between core intermediate-goods inflation and core finished-goods inflation. So, the re-acceleration in core intermediate-goods inflation could lead to a re-acceleration in core finished-goods inflation a few months down the road. That said, the correlation between the two when core intermediate-goods inflation is advanced by four months is only 0.27, suggesting a relatively weak relationship. For the record, there seems to be little relationship between core intermediate-goods producer inflation and core consumer -goods inflation, contemporaneously or leading. Moreover, core consumer-goods wholesale inflation does not show any leading characteristics with regard to core consumer-goods retail inflation.

Chart 1

Chart 2

I guess the bottom line of all this is that unless the Fed is more worried about producer inflation than consumer inflation, the May PPI data are not terribly relevant to FOMC policy decisions, with one exception . The medical care component of the PPI increased only 0.1% in May after a 0.2% increase in April. Medical care has a relatively high weight in the Personal Consumption Expenditures (PCE) price index, the presumed Fed-preferred measure of consumer inflation. Therefore, the May core PCE price index would be expected to again show only a relatively small increase as far a medical care costs are concerned.

Upside Surprise on May CPI Could Imply Downside Surprise to Real Retail Sales

If the headline May CPI increase should follow in the footsteps of the May PPI higher-than-expected increase, then there might be a downside surprise to May retail sales. Taking out bar and restaurant sales from total retail sales and deflating that by the PPI for consumer goods, we find that this measure of "real" retail sales increased by only 0.3% in May compared to the 1.5% increase (again, excluding sales of food services) in reported nominal retail sales. On a three-month basis, this measure of real retail sales has contracted 1.1%. See Chart 3 below for the pictorial of all this. But we will have to wait until Friday morning for the CPI report to more accurately gauge the improvement in price-adjusted retail sales.

On the Verge of an Historic First?

On Tuesday, the yield on the Fed's constant-maturity 10-year Treasury security closed at 5.26%, which also was the level of the effective federal funds rate. The reason I mention this is that we may be only one stronger-than-expected economic release away from the yield on the 10-year Treasury security going above the effective federal funds rate. If this positive spread between the Treasury 10-year and the fed funds rate were to be maintained on a monthly average basis, it would be the first time in the history of this series, which dates back to August 1954, that we have gone from a negative spread back to a positive spread without the federal funds rate falling (see Chart 3). Perhaps we do live in a new era?

Chart 3

Unemployment Claimants Higher Than Year-Ago

Looking at unemployment claims on an unadjusted basis, new claims have for the past two weeks once again moved above year-ago levels. Continuing claims persistently have been above year-ago levels since mid February. See Chart 4 for the behavior of claims in 2007. The fact that both new and continuing unemployment insurance claims are above year-ago levels is evidence of a weakening demand for labor. These claims data are about as pure as the driven snow - no seasonal adjustments, no sample, but a universe and no business "birth/death" adjustments.

Chart 4

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules