Wednesday, January 20, 2010

Producer Price Index (December)

* No major surprises. The rise in food prices was larger than anticipated and the drop in quotes for energy was a bit less than expected.
Meanwhile, the core was held back by a pullback in light truck prices. But, the core ex motor vehicles was +0.1% -- right in line with the
recent trend.
* As we have been stressing for some time, the PPI measurement of motor vehicle prices appears to be entirely disconnected from reality and
the main focus in this report should be on the core ex motor vehicles. Over the past several years, the motor vehicle component has
consistently registered wide swings from month-to-month even when there is no sign of any meaningful movement in the underlying trend.
We're unsure whether the problem in the PPI measure of motor vehicle prices is attributable to sampling difficulties or some other
methodological issue, but it is clearly a source of distortion in the monthly results that should be ignored.
* Price readings for most capital equipment and consumer good categories were little changed in December. In fact, the only item (other than
light trucks) that really stands out is a 3.6% spike in jewelry prices -- obviously a response to the recent elevation in precious metal prices.
* The early stage readings showed some elevation in metals prices -- particularly, iron, steel, copper and aluminum -- which helped to push up
the core crude materials gauge. Otherwise, things were relatively tame.
* However, quotes for wholesale gasoline prices have soared since the end of December and the recent freeze across the southeastern US should
lead to a spike in quotes for citrus products. So, we are likely to see some renewed elevation in the headline PPI for January.
* The bottom line is that deflation risk seems to be falling as economic recovery takes hold but, at the same time, there is little sign of any
underlying build-up of inflation pressures at the wholesale level.

[Source: Morgan Stanley]

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