U.S. de­fla­tion de­bate gets louder after pro­ducer prices fall

Financial Mirror (Cyprus) - - FRONT PAGE -

The fears of de­fla­tion due to lower en­ergy prices and lower de­mand are likely to get stronger. The U.S. Depart­ment of Labour 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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