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Wednesday, August 17, 2005

PPI Rises Strongly on Higher Energy Costs

Data on the Producer Price Index came out today in a report from the BLS and the interpretation is straightforward.  Producer prices are up 1% in July, an annual rate of 12%, and almost all of that is attributed to rising in energy costs.  Combined with the CPI report yesterday, the interpretation is that producers are, for now, absorbing higher energy costs rather than passing them along in the form of higher prices.   That means there is inflationary pressure building due to higher energy costs that is not yet reflected in output prices.  Sounding the appropriate cautionary note on the use of noisy monthly statistics, this will certainly catch the Fed's attention and point towards further rate increases. 

I do want to add one note to the stories I've seen on this so far.  With input costs rising faster than output prices, the squeeze on profit will make it more difficult for wages to increase to compensate for increased productivity and to compensate for inflation.  This may explain, in part, why wages have remained flat during the recovery.  Thus, even if energy prices fall, inflation pressure and hence pressure to raise rates will remain due to underlying pressure for wages to rise.

Press stories:  NY Times, Washington Post, CNN Money, Bloomberg.
Blogs:  I will add these as I find them today.

    Posted by on Wednesday, August 17, 2005 at 10:35 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (7)


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