The producer price index (PPI), a measure of the prices received by producers of goods, increased in November for all finished goods and for core goods, finished goods excluding food and energy. The PPI is very volatile from month to month so annual growth figures can be more meaningful. Prices of core finished goods have increased at an annual pace between 0.5 and 2 percent for the past 13 months, well below the 3.6 percent 10 year average, but strong growth in prices of intermediate and crude goods suggest that inflation is more likely than deflation in the year ahead. Already mortgage rates have begun to rise due to rising treasury rates. Today’s inflation data suggest that continued upward pressure on rates is ahead.
The annual increase in prices of core finished goods was 1.2 percent compared with 4.7 percent for intermediate goods and 30.2 percent for crude goods (all excluding food and energy). A similar pattern is seen when looking at the indexes that include food and energy prices. The price index for all finished goods rose 3.5 percent in the year ending November 2010, while prices of intermediate goods increased 6.3 percent and prices of crude goods rose 12.8 percent. All three indexes have averaged between 3 and 4 percent over the past 10 years, but the average obscures large swings in price growth, especially among intermediate and crude goods.
Retail Sales were strong in November and were revised higher for October. General merchandise, sporting goods, hobby, book & music stores, and clothing stores saw strong growth as holiday shopping was underway. Sales increased at gasoline stations as the price of gas rose.
At today’s Federal Open Market Committee (FOMC) meeting, the FOMC held the Federal Funds rate at its near zero range. Despite upward pressure on Treasury rates, the Committee held to its previous commitment to purchase $600 billion in Treasury securities by the end of June 2011, generally judging that low inflation is a greater risk to price stability than high inflation in the period ahead. The Committee pledged to continue to monitor and adjust its actions to manage inflationary and deflationary risks. Dr. Hoenig again dissented from this FOMC decision because he believes that the current policy stance is too accommodative and could lead to higher inflation in the future.