Energy and Food Prices Bring Down Headline Wholesale Price Index
The Producer Price Index (PPI) of Finished Goods fell 1.9% in December after a 2.2% drop in the prior month, reflecting lower prices for energy (-9.3%) and food (-1.5%). In 2008, the PPI fell 0.9% vs. a 6.2% jump in 2007. The 20.3% drop of the energy price index was the main reason for a sharp reversal of the wholesale price index in 2008. The food price index climbed 3.7% in 2008 vs. a 7.6% gain in 2007.
The core PPI, which excludes food and energy, moved up 0.2% in December vs. 0.1% gain in November. On a year-to-year basis, the core PPI has risen 4.3% in 2008 vs. a 2.0% increase in 2007. Given the weak economic situation, it is not clear why core wholesale prices continue to advance. For example, auto sales have plunged, but car prices in this report show a 1.2% increase in December, following three monthly declines. The year-to-year price gains reported for various core items – apparel, furniture, household appliances, and costume jewelry – beg questions. The PPI for intermediate goods, both all items and core, fell in December, as did crude goods prices. The Consumer Price Index report, to be published on January 16, should sort out some of these issues.
Jobless Claims Data – Seasonal Factors Could Be Source of Distortion
Initial jobless claims rose 54,000 to 524,000 during the week ended January 10. Initial jobless claims fell in each of the two prior weeks; both weeks included holidays which could have distorted readings. Jobless claims data from the next two weeks will offer guidance about whether the hiring situation remains weak or in fact there is an improvement underway. Continuing claims, which lag initial claims by one week, fell to 4.497 million vs. 4.612 in the previous week. The insured unemployment rate held steady at 3.4%.
Euro-zone: Interest Rates, Inflation, the Economy – All Fall Down
As widely expected, the European Central Bank (ECB) lopped another 50 bps off its refi rate this morning, taking it to 2.0%. Rates have now come down by 225 bps in four successive steps, including a 75 bps cut in December, as the Euro-zone economy hits the skids and inflation drops sharply.
In his subsequent press conference, President Trichet acknowledged that economic data and surveys over the past month point to "a further weakening of economic activity around the turn of the year" and warned that Euro-zone demand is likely to be "dampened for a protracted period" with growth risks to the downside. He also acknowledged that the slowing economy has reduced inflation risks, and that the rate of inflation is likely to "fall significantly" in mid-year, in part because of base effects.
More important, however, was the way in which Trichet overtly tried to manage market interest rate expectations going forward. He noted that month-to-month data are likely to be quite volatile for a while, and that the bank does not react to such short-term figures. He warned that having fallen by mid-year, inflation could then start to pick up again in the second half. And, he stated that with the next policy meeting only three weeks away "we do not consider that February could be an important policy making meeting … the next important meeting will be in March" when the bank will have new information and new projections.
So, the ECB assumes it is on hold next month, even if headline inflation drops further in January and the economic data continue to be grim.
