The US PPI for the month of January came in at a rise of 1.0% higher than the expected and previous readings of 0.4% and -0.1% respectively. As for the yearly reading, data shows a rise of 7.4%, marking the highest since 1981, was slightly lower than the forecasted rise of 7.5% yet higher than the previous reading of 6.3%.
As we witnessed last week, the January consumer price index also showed a rise in costs but it is obvious that the high prices at the wholesale level will add to the worries that the economic slowdown is not aiding inflationary pressures and easing them. This added more wood to the bonfire. The report triggered more fears among people and economists as a whole that the economy might enter a state of stagflation similar to that back in the late 1970s.
Now what might pose a threat is how this report could charge the Feds to unleash their hawkish side since some have already stated that the cuts seen over the past six months are just more than enough. Is this the report the right switch for the Feds to wake up and smell the coffee? They have been on a dovish stand for a really long time concentrating on growth levels and neglecting inflation. Yes it was all for the benefit of the economy and for them to escape a recession but is the solution to avoid a recession, STAGFLATION??!! That is the worse state an economy could enter.
Prices were pushed higher in January by energy and food prices as usual. Energy prices rebounded by 1.5 percent in January after dropping 3% in December. The trend for energy has been moving heavily in both directions especially after the large 11.4% gain witnessed in November. Gasoline prices also inclined 2.9% while home heating oil prices climbed 8.5%.
Concerning food prices, they soared 1.7% in January, marking the largest gain since October 2004. Prices of intermediate goods waiting for further processing inclined 1.4% while book publishing costs rose 1.7% in February making it the fastest pace since March 2002. Finally, crude materials increased 2.5% in January after a 1.1% gain in December.
Moving on to core prices, the Core PPI for the month of January came in at 0.4% higher than both the expected and previous rise of 0.2%. The yearly reading came in at 2.3% slightly higher than the projected rise of 2.2% and higher than the previous reading of 2.0%.
On the core level, prices were driven by drug and car prices. Car and light truck prices in January both rose 0.3% while wholesale prices for drug preparation leaped 1.5% over the month. Core intermediate goods continued to move to the upside as it increased 1.0%. Over the past year, core intermediate PPI jumped 4.1%, the biggest rise since December 2006.
New gains have been seen during this report and that is just scary. But according to Richard Fisher, the president of the Federal Reserve Bank of Dallas in a speech last week, that the rising food and energy prices is something outside the Fed's control since prices are being driven by demand from new consumers in India and China. So is this just a temporary fluke? If those outside factors were not visible, really, how much of a difference would it make? The Feds are stuck now between a rock and a hard place on which way to go.
The dollar gained against majors at the time of the report as a sudden market reaction after the data was revealed while U.S. stocks futures fell. S&P 500 futures dropped 4.5 points to 1.367.10; Nasdaq 100 futures fell 4.25 points to 1,781.25; and Dow Jones Industrial average futures also declined 41 points to 12.525.
In a separate report, the Conference Board released its index of consumer confidence for February showing that it declined heavily to 75 from the previous revised reading to the downside to 87.3 from an original 87.9 reading in January. Economists expected a reading of 81 but it just wasn't low enough. This reading was the lowest in 15 years keeping aside the war on Iraq in 2003.
Alongside the Michigan sentiment which declined recently, the outlook for the U.S. economy doesn't seem good. Consumers lost their confidence in the markets and with all factors added together, this is just a crystal clear sign of both a contraction and sluggish growth in 2008. Business conditions have taken a sharp downturn and according to many consumers, jobs are still hard to find. For quite some time the labor market was the savior for the U.S. economy but even that now has its hands tied behind its back.
Looking at the market now, the gains made by the greenback against the majors have reversed to show losses. U.S. stocks continued to decline further with no holding back. No grudge can be held against consumers because hey, who can blame them? With no clear direction for the economyÃ¢â‚¬Â¦actually, there is a direction but it's obvious that it took a detour and went the wrong way; consumers lost hope! Feds what will you do?!