No Food, No Gas, No Inflation
The U.S. Department of Labor today announced that the Producer Price Index rose 0.7%. Most of that increase was due to a 2.7% increase in wholesale food prices, which rose 2.4% in March, the biggest increase in over 25 years.
Another big factor in the the overall rise was an increase of 2.1% in the wholesale price of gasoline. When you compare last March's PPI to the March 2009 PPI, this year showed an increase of 6% year over year.
That's the bad news.
When you take out these two "volatile" components, food and gasoline, the "core" producer price index only rose .1% last month. And, according to the Consumer Price Index for March which was reported last week, prices that consumers paid for goods didn't really increase at all due to large wholesale inventories and not much demand, meaning, the wholesalers couldn't pass on their higher costs to the consumer.
The good news(?): fears of inflation are unjustified if you take away food or gasoline prices. Consequently it is likely that the Federal Reserve will keep lending rates low when they meet next week.
At some point these wholesale price pressures are going to affect the cost of food and gasoline that people pay at the store and pump. Producers will need to make some amont of profit sometime soon to stay in business. Case in point, gas station prices in Monmouth County, New Jersey have risen by 5-10 cents in the last few weeks.
People will have to make room in their budget for higher food and gas prices, unless they can figure out a way to stop eating, and are able to walk to work.
Just as an aside, for anyone who is contemplating buying a nice gift for Mother's Day or an engagement ring, one of the "core" components of the producer price index - jewelry - rose 5% in March, the biggest gain since 1982.
It's a good bet that prices will be higher at the jewelry store, too.