raw material core prices still moving up
businesscycle.com
Inflation or Deflation
July 11, 2002
BIG PICTURE: Rise In Industrial Prices, But No Inflation
By JOHN MCAULEY Of DOW JONES NEWSWIRES
NEW YORK -- The producer price index for June was as benign as expected, so, there's no reason to worry about inflation.
But the PPI - especially the details - also provided signs of a pronounced pickup in the industrial economy.
The headline finished goods PPI inched up by 0.1%, while the core non-food, non-energy component only rose by 0.2%.
Meanwhile, intermediate prices rose by 0.2%, both total and core.
But, most importantly, crude goods, which are raw materials at the earliest stage of processing, saw a gain in core prices, which also exclude those related to the food and energy sectors. Overall crude good prices fell by 3.6% in June, but core crude good prices rose by 1.6%.
This rise in core crude prices is the economic nugget within the PPI report. Rather than an indicator of some inflation risks in the pipeline, some economists are treating it as evidence of economic rebound.
"That increase is a sign of a fairly strong industrial sector economic recovery by year-end," said Anirvan Banerji, research director at the Economic Cycle Research Institute.
In fact, ECRI compiles an index of industrial prices using prices taken from the Journal of Commerce's, which was up 19.1% at a smoothed annualized rate as of July 1, almost exactly reversing a 20.5% decline six months earlier.
The run-up in industrial material prices has been broad-based and in some cases attributable to specific factors.
For instance, steel scrap prices rose by 1.8% in June, after increases of 0.2% in May and 10.8% in April. Steel scrap prices are a proxy for rolled steel prices and the recent increases are "directly attributable to the steel tariffs put in place earlier this year," according to Pete Kretzmer, senior economist at Banc of America Securities.
At a press conference in Washington Thursday, however, representatives of the U.S. steel industry argued that the tariffs were not the cause of the recent increases in steel prices.
In any case, the PPI data also show widespread rises in other metals prices in June: aluminum scrap prices rose by 2.4%, copper scrap prices rose by 1.7%, and other nonferrous metals prices rose by 1.0%.
In addition, wastepaper prices rose by 15.0% in June after a gain of 12.0% in May and 5.8% in April.
"Wastepaper prices are high because collections had fallen very low when prices were low, and now there is a sharp pickup in demand, especially in China, which caused demand to run well ahead of supply," explained a paper company spokesperson.
Thus, this truly is a case of demand leading to price pressures, but it fits the description that ECRI's Banerji made. "This is one of the very rare indicators that works both to signal inflation and industrial activity."
Nevertheless, in the current circumstances, the rise in industrial prices is much more important as a sign of a developing worldwide industrial recovery, he said.
"At the beginning of this year, the leading indicators of inflation were at 26-year lows, so we're just coming off those lows, but we're not really looking at an inflation threat," noted Banerji.
But while some economists view inflation pressures tolerantly, the crucial question is: how will the Federal Reserve policy makers regard it?
Jim Glassman, senior economist at JPMorgan Securities, was an economist at the Fed throughout Paul Volcker's time as chairman and through the early years of Alan Greenspan. "I never view increases in industrial prices as an inflation signal. It's an indication of industrial activity and that's the way we viewed it at the Fed," he explained.
If that's still true, then the recent rise in industrial material prices could bring smiles of satisfaction rather than frowns of concern in the halls of the Marriner Eccles Federal Reserve Building in Washington.
ECRI's Banerji pointed out, "maybe there's more inflation than before, but deflation, which is the concern du jour, is not a likelihood. The message is that the U.S. does not have a deflationary economy like Japan." |
