The December PPI

January 14, 2006 – The U.S. Producer Price Index for finished goods (the PPI) rose by a big 0.9% in December, more than reversing November’s 0.7% decline (Chart 1).

Chart 1. The PPI. Percent change. Monthly and 3-month moving average. January 2000 through December 2005.

A rebound in wholesale energy prices (especially gasoline prices) accounted for all of the bounce in December PPI growth. The PPI for finished energy goods rose by 3.1% in December after a 4% November drop (Chart 2).

Chart 2. The PPI for energy. Percent change. Monthly and 3-month moving average. January 2000 through December 2005.

Excluding energy, the PPI rose by 0.3% in December, matching November’s increase. The closely-watched core PPI (excluding food and energy prices) rose by 0.1% in both of the last two months (Chart 3).

Chart 3. The core PPI. Percent change. Monthly and 3-month moving average. January 2000 through December 2005.

FOMC members have been worrying that the sustained high level of energy costs might eventually fuel inflationary growth in non-energy prices and wages. These data should help to keep those fears alive and well. As of December, the PPI for finished energy goods was a hefty 23.9% higher than its level in December 2004 – and only 1.1% below October’s post-hurricane peak (Chart 4).

Chart 4. The PPI for energy. Year-ago percent change. January 1987 through December 2005.

At the same time, the recent modest trend in core PPI growth reinforces the argument that the FOMC’s inflation fears aren’t coming true yet (Chart 5). The core PPI rose by just 1.7% in the twelve months through December. That’s 0.7 percentage points less growth than the comparable increase of 2.4% in December 2004.

Chart 5. The core PPI. Year-ago percent change. January 1987 through December 2005.

Suzanne Rizzo

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