Stagflation whispers are starting to be heard. Per Google Trends, news references to stagflation reached a 3 year high this week. Google searches this week for stagflation were topped only when Greenspan warned that stagflation was a possibility in December 2007.
Stagflation refers to a stagnant economy and inflation coinciding. Typically as the economy heats up, inflation will start to pick up. The Fed can then raise rates to slow the economy down and inflation with it. Or vice versa, lowering rates would stimulate the economy at the risk of inflation. Currently we have the economy starting to slow down with inflation appearing to pick up steam.
The Bureau of Labor Statistics reported the Producer Price Index (PPI) this Tuesday. PPI is a measure of the average price level for capital and consumer goods received by producers. This measures price changes before they are passed on to consumers.
The PPI for Finished Goods rose 0.99% in January 2008 over December 2007. PPI rose 7.71% January 2008 compared to January 2007. Core PPI (excluding food and energy), rose 0.43% month over month and 2.37% year over year. PPI is much more volatile than CPI. It also leads CPI. Price increase are not immediately passed on to consumers. However CPI does seem to follow the patterns formed by a 24 month average of the core PPI. Increases in PPI will eventually turn into increases in CPI; the same with decreases.
Most of the recent surge coming from increases in food and energy. However, if there isn’t a quick reversal, it looks like core PPI and core CPI will be heading up as well.
Thursday, February 28, 2008
PPI surges higher; Stagflation whispers are getting louder
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