The Deflation Debate Gets Louder After Producer Prices

The fears of deflation due to lower energy prices and lower demand are likely to get stronger. The U.S. Department of Labor reported that the Producer Price Index (PPI) was down by 0.2% in the month of November. While producer prices are not necessarily the same as consumer prices, this is representative of deflation on the wholesale level. If the negative readings remain in place much longer, that directional price change should start to be reflected at the consumer level.

The only relatively good news here is that if you stripped out food and energy, the core PPI was unchanged. Dow Jones was predicting a 0.1% decline on the headline PPI data and for a 0.1% gain on the core reading, ex-food and energy.

It turns out that energy prices were down a sharp 3.1% on the month, which was reflected in the cost of petroleum-related products. This also appears to have been the fifth consecutive month with declining energy prices — and the gasoline index was down over 6% in November alone.

While this one number does not look all that atrocious on the surface, one has to remember that this is a November reading. In December we have now seen oil prices break under $60, and it is hard to find a single source that believes a hard bottom has been put in.

Another drop was seen in food prices, -0.2% in November.

Whether this is true deflation still remains up for debate. What is not up for debate is the price pressures, which are headed in the direction which would support the deflationary argument. Stay tuned.

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