Democrat From Kentucky

Democrat from Kentucky
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Producer Price Reports Tuesday, October 18, 2005

Another report by Dr. Peter Morici. He's been doing this economics stuff for a long time. He makes a lot of sense. Unfortunately, he seems to think the fed gets it wrong.

Producer Price Report Shows Inflation Poses Little Threat

Today, the Labor Department reported the Producer Price Index rose 1.9 percent in September, thanks largely to a surge in energy prices.

However, the report indicates inflation is not spreading to nonenergy goods and services that reach final consumers. The index for finished goods, less energy and food, rose only 0.2 percent, and prices for final consumer goods, less energy, were up 0.1 percent.

The latter two indexes are good predictors of future consumer price inflation. For example those were down in August, and the CPI, less food and energy, rose only 0.1 percent in September, reflecting some retail markup.

Consumer price inflation will likely be tame in the months ahead. Gasoline prices and crude oil have fallen in October. The recent spurt in energy prices has not passed through to wages, which account for about two thirds of production costs, and rapid productivity improvements are permitting businesses to absorb rising energy and material costs before those reach final consumers of nonenergy goods.

The core CPI, the CPI net of energy and food, has risen only 0.1 percent or less each month for the last six months, and today’s report on wholesale prices indicates future inflation likely will be contained.

The modest increase in wholesale prices for final consumer goods less energy indicate Federal Reserve concerns about inflation are exaggerated. Coupled with slowing automobile and other retail sales, this cooling of core inflation indicates consumers are strapped, and additional interest rate increases are not needed.

The reason for near zero inflation outside the energy sector is quite simple. Consumers have no more money to spend. Consumption exceeded disposable income in June, July and August. Credit card delinquency rates are very high.

Consumers can no longer easily add to credit card debt and home equity loans. With gasoline prices up, they are cutting back on spending in other areas. Stores like Wal-Mart are already discounting to accommodate weak consumer spending, which is resulting in lower prices for most products.

Some retailers and auto manufacturers are attempting to raise prices in October but those efforts will be frustrated. Attempts to raise prices will be met with fierce consumer resistance.

Energy prices will subside as Gulf oil, gas and refining come back on line. When energy prices fall, deflation, not inflation, may be the problem. Should the Fed persist in pushing up interest rates, it risks throwing the economy into a recession.

The Fed has no need to tighten credit markets further to slow the economy.

Higher energy prices have done the work of higher interest rates, and the Fed should not raise interest rates in December.

Peter Morici
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815


As usual, his points are great. Credit is as tight as it needs to get because huge swathes of the country need rebuilding literally from the ground up and the holiday shopping season is upon us. I'd say retail markets will take a beating this winter as many won't have the money to shop unless oil prices drop dramatically across the board and I don't think that will happen.

posted by Stithmeister @ 11:19 PM

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At 4:34 AM, Blogger Cynicus said...
So this prof is bucking the common wisdom. Exactly how can continued high energy prices not result in costs passed on to consumers? (Or perhaps, for how long can the cost not be passed on?)

Sure, for the moment - right this exact moment - the energy cost hasn't spread to ALL consumer prices. But isn't this like long-range weather forecasting? That is, to say "the hurricane is down by Jamaica right this moment, so it won't be a threat to Florida" is possibly true, but a hell of a risky prediction.

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Location: Harrodsburg, Kentucky, United States

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