How Long Until Producer Prices Drop To Consumer Prices? (TLT)

This morning we saw the release of the Producer Price index, or wholesale inflation.  Inflation is the key word today.  The headline PPI number for November came in at +3.2%.  The core-PPI after you strip out food and energy (and whatever else is volatile) was up only +0.4%.  Both were much higher than the approximate 1.6% headline estimate and the +0.2% core estimate.

But there is a real problem here.  The core year over year headline PPI is +7.2% and the core year over year change is +2.2%.  Energy prices were up 14.1%, ouch.

This number seemed like the highest I could recall and there is a reason.  This looks like biggest gain in over 30 years.  Since the late 1980’s I have always seen the rule that producers have a hard time passing price gains down to consumers, but when you see numbers like this you can’t expect that to stay the case forever.

Imagine how high these numbers would be on the core rate if the Labor Department told the truth and if their computers were accurate.

The 10-Year Treasury Note closed out with a 4.08% yield yesterday.  The yield this morning is 4.14%.  The iShares Lehman 20+ Year Treasury ETF (NYSE:TLT) is also indicated slightly lower to mirror lower treasury prices and higher yields, although it hasn’t traded yet.

Jon C. Ogg
December 13, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.