Wholesale Inflation Soars -- Will You Pay the Price?
A Big Jump in Wholesale Prices Was Unexpected, but Economists Advise Against Panic
By DAN ARNALL
abcnews.go.com
Dec. 19, 2006 — - The government released data this morning that shows that price pressures at the wholesale level increased by the fastest pace in more than three decades. The report can only be described as off the charts.
The Producer Price Index (PPI) went up by 2.0 percent during November -- four times the increase economists were predicting for the month. The last time we had seen a monthly move this big was November 1974 -- when Gerald Ford had just taken over the Oval Office after Nixon's resignation.
Even the so-called core rate -- which excludes food and energy prices -- saw a big swing at +1.3 percent for the month.
So will consumers feel the bite of the big jump in wholesale prices? Maybe, maybe not.
In the last four months, the Federal Reserve Board has not raised interest rates, reversing a two-year trend of interest rate hikes to slow inflation. The Fed funds rate affects many consumer credit vehicles, including credit cards.
Many economists believe that the Fed, which fights inflation by increasing rates, might start lowering rates next year as inflation pressures eased -- with some expecting a quarter-point rate cut by June of 2007. That would ease the burden of those high interest rates that many consumers are paying on credit card debt.
Lower interest rates could also signal the beginning of price drops for a variety of consumer products. Lower prices for gas and other consumer essentials would give Americans more buying power at a time when many are paying off post-holiday debt.
But this morning's inflation report cast doubt on whether inflation is really settling as softly as the Federal Reserve hoped. So might the Fed delay the anticipated rate cuts, or even begin raising rates again?
Consumer Prices Were Unchanged
It's not all bad news. While wholesale prices jumped sharply, it's important to note that consumer prices held steady last month -- literally zero change.
The Fed doesn't meet again until the end of January, which means the government will release a wholesale inflation report before making any decisions about rates.
"The Federal Reserve will want to see several more months of data before changing interest rate policy, and no change is likely at least until the March 27-28 meeting of [the Fed's] Open Market Committee," said Peter Morici, an economist at the University of Maryland.
What's Driving Wholesale Numbers So High?
One thing that's tempering the report's rather dire numbers are the annual figures.
During the past year (from November 2005), wholesale prices have increased just 0.9 percent. When you take out volatile food and energy prices to get the annual core rate, wholesale prices are up 1.8 percent for the year. Both figures are inside the Fed's presumed comfort zone of under 2 percent and reflect a big drop in the cost of energy during the past year.
The reports shows some big price increases from October to November.
Here are the big movers:
* Gasoline: +17.9 percent
* Home Heating Oil +7.7 percent
* Light trucks: +13.7 percent
* Diesel Fuel: +14.6 percent
So Is Inflation Roaring?
Well, no. The report should not be interpreted to reflect that inflation is out of control. This is certainly a report that's raising concerns, but it really is just a reversal of the big downward moves during the previous two months.
Many economists are tempering their reactions because of the recent volatility in this report, advising consumers to keep a close eye on inflation, but also to keep the numbers in perspective.
So What Does This Mean for Consumers?
Consumers aren't being dramatically affected by this upward price swing. Last month's retail price index, released late last month, showed that prices didn't move at all, up or down. Often wholesale inflation is "smoothed" by the retailers who absorb some of the big up and down moves so as not to upset the consumer with big changes.
Wall Street will likely open down and probably see a negative day, but this isn't likely to change the trend of stocks heading upward.
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