by Jin Wu
U.S. Producer Price Index (PPI), which measures changes in prices received by domestic producers, posted a decline in January mainly due to plunging energy costs and a strengthening of the U.S. dollar, according to the U.S. Bureau of Labor Statistics Wednesday.
The Producer Price Index (PPI) for final demand decreased a seasonally adjusted 0.8 percent in January from December. It’s the biggest drop since the new PPI calculation system was begun experimentally in November 2009.
The index for final demand goods moved down 2.1 percent, the seventh consecutive decrease, mainly due to the 10.3 percent drop in final demand energy prices in which the gasoline price index played the most important part: a 24.0 percent decrease.
Excluding foods, energy, and trade services, the index for final demand still moved down 0.3 percent after edging up 0.1 percent in December.
Within intermediate demand, the index for processed goods prices declined 2.8 percent from December, the largest decline since December 2008; and the price index for unprocessed goods dropped 9.4 percent, the largest drop since November 2008.
Guido Lorenzoni, professor of economics at Northwestern University and research associate of the National Bureau of Economic Research, said it is not surprising that price indexes of goods experienced a much bigger impact than the index of services because the former “relied more on energy input.”
A 19.2 percent decline in diesel fuel prices was a major factor in the decrease in the index for processed goods for intermediate demand, and a 30.6 percent drop in crude petroleum enormously affected the index for unprocessed goods.
For the 12 months ended in January, the index for unprocessed goods for intermediate demand declined 18.4 percent, the largest 12-month drop since September 2009.
Lorenzoni said people shouldn’t worry about deflation at this moment. “This is consistent with what we have seen in the last year: a very low inflation essentially due to declining oil prices,” he said. “We will worry about deflation if there are a demand decline and growing unemployment. In this case, the reason of falling prices is at the supply side, especially thanks to the falling oil prices.”
The Federal Reserve said after its Federal Open Market Committee (FOMC) meeting in January that “inflation is anticipated to decline further in the near term,” but the committee expects it to rise gradually toward 2 percent in the coming years once “the transitory effects of lower energy prices” dissipate.
Since December 2008 the Fed has kept its short-term interest rate near zero. The Fed reiterated in January that “it can be patient in beginning to normalize the stance of monetary policy.” Lorenzoni said the Fed may be “even more patient than it claimed” and “the short-term interest may be updated later than June.”
(Note: The FD-ID indexes typically have a reference base of November, 2009)