Tuesday, November 17, 2009

What Stinkin' Inflation? PPI Edition

Briefing detailed the latest PPI release:

The producer price index rose 0.3% in October, well below the consensus expectation of an increase of 0.5%.

Excluding food and energy prices, core PPI fell an astounding 0.6% over the month. For the year, core PPI has only increased 0.7% after posting a 1.4% year-over-year increase in September.

On the surface, the numbers would suggest an increasingly deflationary environment. However, the data for October was skewed.

The decline in core prices was due to large drops in vehicle prices. Passenger car prices declined 0.5% month-over-month after increasing 1.0%. Light truck prices fell 5.2% and heavy trucks prices declined 0.1%.

Briefing then poorly explains the drop in auto prices:
The information on the decline in motor vehicle prices is sketchy. New 2010 model year vehicle prices were introduced in this month's PPI report. The drop in price would suggest that car manufacturers are planning on introducing new model vehicles at lower price points. If this hold true, prices should hold at these levels through next summer.
But Market News quickly disproves this theory:
Core was cut by -5.2% in light trucks and -0.5% in cars where quality changes/model year changes and slack demand cut prices. The Bureau of Labor Statistics said the value of quality changes for 2010 model cars was $250 and for light trucks $793, less than usual, and that this pricing was adjusted out.
My thought of why there was an increase (and this could be wrong). Cash for clunkers. When the government was throwing cash at the end-user, this artificially increased demand for autos (by dealers) from producers. As the program ran out, the demand ran out, thus the pricing power ran out.

Too logical?

Source: BLS

1 comment:

  1. Your explanation does make sense. However, I expect that we will have inflation. I think that we will not continue to recover the way we have been unless the government continues to borrow at the same rate we have been borrowing.

    Eventually, there will not be bond buyers so eager to lend us their money, at least not at the rates that they are receiving now. Would it really be unreasonable for a significant portion of buyers to hold off buying bonds until the rates rise to something that allows them to not feel overextended on US IOUs?

    If money becomes more expensive, that will put some pressure on prices to rise. If the government stops subsidizing purchases, will there be enough consumer demand for items to keep the economy moving?

    I don't come close to having the answers, but we have had a stock bubble, followed by a commodities bubble, and we were recently experiencing record high bond prices.

    Should any of us be surprised if the price of bonds has a similar reversion to the mean?