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Thursday, April 22, 2010

Is the Six Percent Rise in Producer Prices a Signal that Inflation is Coming?

At MoneyWatch, why the 6 percent headline inflation number for producer prices announced this morning does not signal that inflation is imminent, and why core inflation rate of .9 percent is a better measure to look at:

Is the Six Percent Rise in Producer Prices a Signal that Inflation is Coming?, by Mark Thoma: Many news reports are noting the six percent increase in the producer price index on a year over year basis and wondering if it signals that inflation is back. However, this report should not be read as a warning that inflation is just around the corner.

Why? The pass through from producer prices to consumer prices is less than 100 percent in any case, and in some cases it is close to zero. Pass through to consumer prices is smaller when the change in producer prices is temporary, and core inflation measures indicate that most of the rise in producer prices was due to a rise in food and energy prices. Once the temporary changes in food and energy prices are stripped out, the core inflation rate only increased .9 percent over the previous year, and that isn't much different from previous measures.

But which measure of inflation should we pay attention to if we want to predict future inflation? Why do we use core inflation instead of "headline" inflation for this purpose?...[...continue reading...]...

    Posted by on Thursday, April 22, 2010 at 10:17 AM in Economics, Inflation, Monetary Policy, MoneyWatch | Permalink  Comments (18)


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