Producer Price Index Increase Remains Moderate

The Producer Price Index (PPI) for October 2010 rate of price increase remained constant compared to previous months.  The headline from the BLS:

The Producer Price Index for Finished Goods increased 0.4 percent in October, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed a 0.4-percent rise in both September and August. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.2 percent in October, and the crude goods index increased 4.3 percent.  On an unadjusted basis, prices for finished goods advanced 4.3 percent for the 12 months ended October 2010, their largest year-over-year gain since a 5.1-percent rise in May 2010.

The interesting element is the continuing compression of the prices / costs as the product is produced through the supply chain.  The crude material costs are growing at 17% YoY, the costs in the intermediate stages are growing at 6.4% YoY, while finished goods costs are growing at 4.3%.  Productivity and cost of labor no doubt are the elements absorbing the cost increases.

There are no new trends developing in the data.

The real question is how this translates into the Consumer Price Index (CPI) which will be released later this week.  Until 2008, the CPI and PPI generally tracked each other.

After 2008, the total PPI price increases on finished goods have not been passed on to consumers.

This implies that costs are being squeezed out of distribution and retail expenses and profits.  How long can such effects continue?

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