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US producer price inflation slows

January 20, 2010 | "Barron’s Econoday"

Headline and core PPI inflation slowed sharply in December. The headline number did not improve as much as hoped while the core eased more than expected. The overall PPI rose 0.2 percent after spiking 1.8 percent in November. The latest gain was a somewhat warmer than the consensus forecast for no change in the index. At the core level, the PPI eased to a flat reading after jumping 0.5 percent in November. The market had expected a 0.1 percent up tick. The headline increase was led by a 1.4 percent jump in food prices as energy dipped 0.4 percent. The core was kept soft in part by a 1.2 percent drop in prices for light trucks.

For the overall PPI, the year-on-year rate increased to 4.7 percent from 2.7 percent in November (seasonally adjusted). The core rate year-ago pace edged down to 0.9 percent from 1.2 percent the previous month. On a not seasonally adjusted basis for December, the year-ago increase for the headline PPI was 4.4 percent while the core was up 0.9 percent.

Net, PPI was in line with expectations. The latest CPI and PPI reports let the Fed continue to characterize inflation as subdued and keep policy on hold. There was little market reaction to today's report but the PPI report had to compete with a lower than expected housing starts number, offset by higher permits.

Market Consensus Before Announcement
The producer price index jumped 1.8 percent in November after gaining 0.3 percent in October. The November gain was led by a 6.9 percent spike in energy and a 0.5 percent gain for food. At the core level, the PPI rebounded 0.5 percent after a huge 0.6 percent drop in October. Looking ahead, the headline PPI is likely to be soft if the uptick of 0.1 percent in the December CPI is an indication. But the PPI does not have services components and will not be helped by weak shelter costs as was the case with the CPI. Higher energy costs likely will have more impact on the PPI than was the case with the CPI.

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