Friday, February 19, 2010

Prices Up and Down

The CPI went up by 0.2% this past month (that’s typical) but core inflation went down by 0.1% (that the first drop since the early 1980’s).

Core inflation is what they get when they take food and energy out of the CPI and recalculate the inflation rate on the goods that are left. They take out food and energy because they are more volatile.

On the other hand, the PPI (producer price index) spiked by 1.4% in January – which is huge. But, this index is fairly volatile, so I wouldn’t read too much into that unless it does this for a few months in a row.

The PPI is capturing prices at the wholesale level that will hit consumers in the next several months. Individual months don’t matter that much – because of their volatility – but the 12 month average has jumped from about –4% to +4% over the last six months. This indicates that demand is picking up in factories.

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