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Producer price inflation threatens to accelerate

Inflation remains very much alive and well at the producer level: producer prices rose fully 1.1% in December, and are up at a 7% annualized pace in the past six months. Not counting food & energy (a tough thing to do since energy prices are an unavoidable component of business costs), prices are up 1.4% over the past year, and have risen 11.3% in the past 5 years. I note also that the Producer Price Index reached a new all-time high in December, eclipsing its former energy-led high set in July '08.

However you slice and dice these numbers, there is no sign of, or even the threat of, deflation. On the contrary. As the second chart suggests, since early 2004 (about the time the Fed shifted into strong accommodative mode by pegging the funds rate at 1% for a full year) producer price inflation has been running at a 3.5% annual rate, about twice the pace of what we saw from 1983 through 2003 (years during which the Fed was actively fighting inflation). With oil prices now reaching new post-2008 highs, and no sign that other prices are declining, it's unlikely that overall inflation will slow, and more likely that it will accelerate from the levels of the past several years.

It's disturbing, to say the least, that the Fed remains so complacent about inflation risks in light of this evidence.

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