Producer Price Index Moderates In January 2011

We watched the energy rise – causing massive distortion in the Producer Price Index (PPI) for December 2011 (analysis here).   We awaited its impact to the entire distribution chain down to the consumers.  Now the January 2011 PPI moderated the energy pulse.

The Producer Price Index for finished goods rose 0.8 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.9 percent in December and 0.7 percent in November and marks the seventh straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.1 percent, and the crude goods index rose 3.3 percent. On an unadjusted basis, prices for finished goods advanced 3.6 percent for the 12 months ended January 2011.

Can this energy cost be absorbed in the supply chain?

The trend lines for finished goods price increases are moderating this energy price increase.

Crude prices have stabilized and retreated somewhat recently.  But do these increases simply get absorbed?  The answer is yes.

Historically, the big pricing swings are partially absorbed at each level of manufacturing.  The consumer only ends up seeing a small portion of increases and decreases.

At each level of the chain -from crude materials to intermediate finished goods to finished good to consumer – each level removes over 1/2 of the  price increase.  What is a likely corollary to this effect is that if and when the PPI declines, CPI may well fall less as the later levels of the supply chain try to regain some of the lost margin.

The CPI on Thursday should come in between 1.5% and 2% for YoY growth based on historical relationships.

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Energy Surging into PPI Future by Steven Hansen