Producer Prices Ease on Receding Food and Energy Prices

Posted by Diane Swonk on January 18, 2012

The producer price index fell 0.1% in December, as both food and energy prices dropped during the month. The largest declines were recorded in fresh and dry vegetables and prices at the pump. Core prices moved up a larger-than-expected 0.3% during the month, with a nearly a third of that rise coming from an increase in the price of light trucks. Our demand for SUVs has not waned in the face of higher fuel costs because producers continue to produce lighter, more fuel-efficient SUVs. Also, many of the people buying these vehicles tend to be in higher-income households, which are willing to pay for more bells and whistles and are less sensitive to gas price movements than the rest of the population.

Separately, at least a portion of the demand for light trucks was driven by delivery services, as employment among couriers and messengers surged in December. Unfortunately, at least a portion of those gains will disappear. Other components of the producer price index were extremely well-behaved. Declines for prices were posted in both the intermediate and crude goods categories.

Bottom Line: The drop in energy prices has already proven to be transitory, as everything from the Arab Spring to saber rattling in Iran has pushed up prices. Overall pricing pressures, however, remain extremely well-contained and are expected to keep the Federal Reserve more focused on unemployment than inflation at the meeting next week.

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