Today, the Federal Reserve received mixed signals regarding inflation. Last week’s great news that inflation seemed under control, with no increase in November’s consumer price index, was obliterated by today’s report on November’s producer price index. This is the price that businesses charge each other for oil, produce, and metals.
The bad news, wholesale prices shot up 2% in November. The producer price index has not increased that much in a month for over 32 years. These latest figures will make it difficult for the Fed to change its stance from a defensive posture of raising interest rates to an expansive posture of lowering rates anytime soon.
It is unusual to see such a high rise in producer price index not reflected in the consumer price index. It means that companies absorbed the rising cost of production and did not pass it on to consumers in the form of higher prices. If the producer price index keeps climbing at such a high rate, these increases will inevitably have to be passed on to consumers. Inflation!
The economic fog is thickening and there are some strong cross currents. It is difficult to predict which way the economy will go in 2007. Fasten your seat belt and turn on the fog lights.
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