November wholesale prices roseLed by a significant increase in energy costs, producer prices rose 0.8% in November -- a gain that suggests policymakers may be winning their battle to avoid deflation. It marked the fifth consecutive monthly producer price rise and the highest since March, and it may be just what the U.S. Federal Reserve wants.

Why is a little inflation at the wholesale level beneficial? It means deflation hasn't taken hold in the U.S., despite the substantially smaller workforce and globalization's cost-cutting impact.

Deflation -- a period of sustained price declines -- robs companies of revenue and can lead to a recession, or even worse. The Fed wants the economy to exhibit some inflation, as long as it remains low, because a little inflation helps maintain the price support companies need to reap the benefits from increased sales, while not cutting into purchasing power.

The core producer price index, which excludes often-volatile food and energy prices, rose 0.3% in November.

A Bloomberg survey had expected both top-line producer prices to increase 0.7% and the core rate to rise 0.3% in November, after an 0.4% rise and a 0.6% decline in October, respectively. Producers prices rose 0.4% and 0.5% in September and August, respectively.

Year-Over-Year Core Inflation Is Still Low

Still, although the economy is showing signs of a slight increase inflation at the producer level, much of it is concentrated in food and energy. During for the past 12 months, wholesale inflation has increased 3.5%, lower than the 4.3% year-over-year rate recorded in October. Wholesale prices rose 4.4% in 2009 and 0.9% in 2008.

However, take away the food and energy component, and much of the past 12 months' inflation disappears. Core producer prices -- closely monitored by the U.S. Federal Reserve -- have risen just 1.2% in the past year. That's lower than the 1.5% year-over-year core rate recorded in October and at the bottom end of the Fed's "comfort zone" for inflation.

In November, finished energy prices rose 2.1%, with much of that stemming from a 4.7% jump in gasoline. Food prices increased 1%, feed stuff rose 1.9%, finished goods (excluding food) were up 0.7%, intermediate goods rose 1.1% and materials for further processing increased 0.6%.

November's producer price report is a partial victory for the Fed because wholesale prices have risen for five straight months, after declining for three consecutive months in the spring. And core prices have risen at a low level every month so far this year, except October. That suggests prices are stabilizing at the wholesale level and that the nation is experiencing disinflation -- or low inflation -- but not the dreaded deflation that robs companies of revenue.

That said, the struggle to prevent deflation is hardly over. Core producer prices are up just 1.2% in the past 12 months, and that's just about as low as the Fed wants this measure to go. Given the risk of further price declines, the central bank will likely have to maintain its quantitative easing program well into the winter.

Increase your money and finance knowledge from home

Building Credit from Scratch

Start building credit...now.

View Course »

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Add a Comment

*0 / 3000 Character Maximum

11 Comments

Filter by:
hi cat

cable tv internet costs ---- up
telephone -=----------------- up
utilities(gas-electric)-------up
home heating fuel-------------up
local real estate taxes-------up
State income taxes------------up
Fed income taxes--------------up
food -------------------------up
Auto fuel---------------------up
bank fees---------------------up
Postal fees stamps etc.-------up
Auto insurance----------------up
homeowner insurance-----------up
Shoes and clothing------------up
Entertainment(movie theater)--up
Auto repair ------------------up
Medical insurance ------------up
Doctor;s office visit---------up
Dental care-------------------up
Hair Cuts---------------------up
College Tuition---------------up

Income -----------------------down

If deflation means lower prices BRING IT ON !!!

December 14 2010 at 9:14 PM Report abuse rate up rate down Reply
warrenbent

"However, take away the food and energy component, and much of the past 12 months' inflation disappears" Yes, if only I could quit eating and consuming energy as well as all products that require energy to produce or deliver, I too could experience this lower level of "coe inflation" to which the author absudly refers. Beyond the eality of a 3.5% tailing annual PPI, that headline figure is for FINISHED producer prices ONLY. Meanwhile the report also revelaed that INTERMEDIATE componednt of producer prices showed a 1.1% increase in November and is now up 6.3% versus a year ago, while the CRUDE component of producer prices increased 0.6% in November and is up a staggering 13.0% in the past twelve months. What this is illustrating is that producer price inflation becomes more intense the deeper into the production process one observes. Over time, some of these earlier increases will filter through to prices for finished goods. It's also important to note that all these inflation figures are the result of monetary policy BEFORE the Fed embarked on QE2, meaning even higher inflation is in store. Yet, the author reassures us this report "aids the deflation fight"? I can't wait for his next article about the benefits of the flying pigs.

December 14 2010 at 2:36 PM Report abuse +1 rate up rate down Reply
1 reply to warrenbent's comment
sal8110

There is only 1 thing deflation hurts, and that is government revenues. With inflation, people get raises and pushed up into ever increasing tax brackets. As a matter of fact, 5% per year inflation will have 50% more people in the top tax bracket in just 12 years.

December 14 2010 at 2:25 PM Report abuse +2 rate up rate down Reply
hello

Apologist for inflation and for state intervention."Deflation-a period of sustained price declines-robs companies of revenue and can lead to a recession,or even worse" Yes,just like the decline in computer prices robs companies of revenue or when competing companies slash prices brings on bankrupcy. The nonsense that fills the business section is beyond belief. And what is this other bogegy monster that's "even worse" than a recession. I guess it's so bad it doesn't even have a name. No,what is really bad is inflation (of which this article is trying to get us use to) robbing every single person. Mr. Lazzaro can you please try and join the rest of us in the real world and stop playing in your Keynesian make believe world.

December 14 2010 at 11:54 AM Report abuse +2 rate up rate down Reply
1 reply to hello's comment
jhrochesterny

I would think that a small amount of deflation would be good..prices would be lower and people might spend more. I know I would, even prices back to what they were before they jumped up, like gas back to 2.00/2.50 would help. I cant see where giving the consumer a break would hurt, since no one wants to give anyone raises worth talking about.

December 14 2010 at 11:40 AM Report abuse +2 rate up rate down Reply