This morning the U.S. Labor Department released its Producer Price Index numbers for March. Overall, the PPI rose one percent over February levels, while the "core" number, which excludes food and energy prices, was flat.
In year-over-year terms (comparing March 2007 to March 2006), the headline PPI jumped 3.2 percent and the core PPI rose 1.7 percent.
Why the big gap between the headline and the core? Energy prices were up 3.6 percent, with food rising 1.4 percent. A flat core number is the natural result of excluding the categories in which prices rose, but it's good to see the core elements behaving themselves.
How this affects Fed policymaking is the big question, of course, and there's plenty of speculation to be had from the usual suspects.
For our purposes, we think inflation tends to be a lagging indicator. If the recent spike in energy prices doesn't recede, however, higher fuel costs will either shrink corporate profit margins or pass through to consumers. Here's economist Brian Bethune of Global Insight, quoted in this morning's Bloomberg story: "Industries continue to suffer from significant cost pressures, but emerging slackness in many markets for final products will limit their ability to pass on effective price increases."
"Producer prices up 1 percent in March," Reuters, April 13, 2007
"INSTANT VIEW 3-U.S. March PPI, Feb trade deficit," Reuters, April 13, 2007
Shobhana Chandra and Joe Richter, "U.S. Economy: Producer Prices Rise; Trade Gap Shrinks," Bloomberg, April 13, 2007