Tuesday, November 17, 2009

To Rise, Inflation Faces an Uphill Climb

Today's producer-price index (PPI) indicated a rise of .3 percent in October. Economists were anticipating a rise of .5 percent. The consumer price index (CPI) is due out tomorrow morning.

Tomorrow's report could mark the start of more notable upward pressure on year-over-year inflation growth. Those who have been predicting higher inflation will certainly create a fuss over the report. However, the reason inflation may rise over the next few months may be because inflation will be measured against the worst depths of the recession, when prices fell across the board.

Mark Gongloff had an interesting article in today's Wall Street Journal. Mr. Gongloff pointed out that thus far, consumers haven't borne the brunt of higher prices as much as producers have (producer inflation has outpaced consumer inflation consistently since February 2008). Companies have responded to their higher costs by slashing their payrolls in the greatest numbers since the Great Depression.

According to Mr. Gongloff, petroleum-related costs account for just 2.3% of U.S. production costs, but employee compensation accounts for 30.3% of production costs. In fact, if rising commodity prices lead to more corporate cost cutting, then producers may re-coup this higher costs by continuing to reduce employee costs.

If the unemployment rate continues to rise, there will be less demand for products which will keep prices low. Thus, a weak labor market can keep inflation in check, even if commodity prices rise. In other words, don't look for inflation pressures to last.

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