Deflation Is Brewing

From Bloomberg:

Producer Prices in U.S. Climbed Less Than Forecast in October

By Courtney Schlisserman

Nov. 17 (Bloomberg) -- Wholesale prices in the U.S. increased in October for just the second time in the past four months, indicating inflation will not be a concern for the Federal Reserve.

The 0.3 percent increase in prices paid to factories, farmers and other producers was smaller than forecast and followed a 0.6 percent drop in September, according to Labor Department data released today in Washington. Excluding food and fuel, so-called core prices unexpectedly dropped 0.6 percent, capping the smallest 12-month gain in five years.

Near-record excess capacity will probably prevent suppliers from passing on the recent rebound in commodity costs for months to come. The report underpins Fed expectations, reiterated yesterday by Chairman Ben S. Bernanke, that inflation will be “subdued,’ allowing policy makers to keep interest rates low for a long time.

Core measures of inflation continue to be remarkably tranquil, if not trending downward,” Richard DeKaser, chief economist at Woodley Park Research in Washington, said before the report. “I think this gives the Fed all the leeway they require to stand on the sidelines.”

Economists forecast prices would rise 0.5 percent, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from no change to an increase of 1.3 percent.

Excluding Food, Fuel

The decrease in prices excluding food and energy last month was the biggest since July 2006. The core measure was forecast to rise 0.1 percent after a 0.1 percent drop a month earlier, according to the Bloomberg News survey.

Compared with a year earlier, companies paid 1.9 percent less for goods today’s report showed. Core costs were up 0.7 percent from a year earlier, the smallest 12-month gain since March 2004.

Prices overall were buoyed by 1.6 percent increases in both food and fuel as the cost of everything from gasoline to vegetables and fruit climbed.

Declining prices of light trucks and passenger cars, which reflected the switch to the 2010 model year, pushed core costs lower.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. The cost of imported goods rose 0.7 percent in October and increased 0.4 percent excluding energy. The government is scheduled to release its consumer price report tomorrow.

‘Subdued’ Inflation

“Inflation seems likely to remain subdued for some time,” Bernanke said yesterday in a speech to the Economic Club of New York. He also said “significant economic challenges remain.”

One challenge is trying to absorb excess capacity. The share of plants in use reached 68.3 percent in June, the lowest level since records began in 1967, according to Fed data. Economists track operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

Fed policy makers this month reiterated plans to keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

Some companies still see pressure to hold down costs. Wal- Mart Stores Inc. Chief Executive Officer Michael T. Durke said the company continues “to experience ongoing deflation across our businesses.”

Falling Prices

Huntsman Corp., a chemical maker, said Nov. 4 that third- quarter sales fell 23 percent to $2.11 billion as a 3 percent increase in volumes could not make up for a 25 percent drop in prices.
Nonetheless, a falling dollar and expanding global economies are forcing up commodity costs.

The U.S. last week raised its forecast for crude-oil prices this year and next on speculation that demand will rise as the global economy improves.

Commodity prices are responding to the weak dollar by rising but core measures are responding to economic slack,” Woodley Park Research’s DeKaser said.

Falling producer prices means the economy has the word Deflation written all over it. Even higher energy prices, which are highly inflationary in most environments have not had much impact. This is more evidence that Deflation is taking root, the dollar will rise, the economy will suffer a double dip (or as I described in a much earlier post, a WWW Recession).
No green shoots evident in this indicator.
Before real growth can return, the bad debt and overcapacity issues and other malinvestments must be corrected. This takes some time for the market to correct, and takes much longer when government central planning insists on "fixing" the economy by attempting to blow another bubble and promote further malinvestments.


  1. I don't disagree with your overall assessment, but here are some additional details about autos that the Bloomberg article left out:

    - Excluding motor vehicles, core prices rose 0.1%; this is important because October is the first month to include the new model year

    - "The October PPI figures are the most volatile of the year, largely because that's when the government updates its data for quality changes in cars and trucks for the new model year. This year, the government said the value of the quality changes for light trucks fell $5.02, while the change in cars was valued at $249.69."

    Source: MarketWatch

  2. PW, there is a new book titled "The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis." Do you believe that the companies owned by private equity companies will lead to the next credit crisis?

  3. In response to Anonymous' comment:
    I do not believe that private equity will be the trigger of the next crisis. Yes, private equity have many highly leveraged companies, but the main problem is the health of the overextended American & European banks with exposure to residential and commercial losses, in my view. The other growing issue, is that of sovereign debt outstanding in America, Japan, and many European countries. We will soon be at a level that nations will be unable to service the interest costs of their debts. I will address this in an upcoming post.

  4. Federal Reserve manipulating gold prices: Ron Paul ; he said that the FED and executive branch are suppressing the inflation data by manipulating gold

    and you know Soros calling for IMF sale to fund Climate change programs is a part of the manipulation

    the Soros plea and all the short positions that his Bullion Bank buddies have for IMF gold Sale to fund Climate Change is nothing but a plea for the Shorts to cover their contracts . everyone hold your gold positions and make these short sellers buy their own contracts and watch gold skyrocket !!!!!!!!!!!!

    Why George Soros is after IMF gold

    Copenhagen climate summit: George Soros urges use of IMF gold for green loans


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