Producer Prices for Finished Goods Jump 0.7% in February; Energy to Blame

Reflecting higher energy prices, the Producer Price Index for finished goods increased 0.7% in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This follows a 0.2% increase in January and a 0.3% decrease in December. Energy prices increased 3.0% in February. Food prices reversed an earlier increase, with prices for finished consumer foods declining 0.5% in February, after moving up 0.7% in the previous month. The index for fresh and dry vegetables accounted for most of the decrease, falling 18.0%. Excluding food and fuel, the so-called core inflation rate advanced 0.2%. This followed an identical 0.2% increase for finished goods in January, after an increase of 0.1% in December. Over the past year, though, on an unadjusted basis, the finished goods index moved up 1.7% for the 12 months ended February 2013, the largest 12-month increase since a 2.3% rise in October 2012. For core prices for finished goods, about 20% of the February increase can be traced to prices for pharmaceutical preparations, which moved up 0.2%. An advance in the index for plastic products also contributed to higher prices for finished goods less foods and energy. By contrast, finished consumer goods prices fell 0.5%. Further up the production chain, at the earlier stages of processing, the index for intermediate goods jumped 1.3% in February, the largest increase since a 1.4% advance in April 2011. For the 12 months ended in February, the index for intermediate goods moved up 1.2%, the largest increase since a 2.9% advance in March 2012. Nearly two-thirds of the February increase can be attributed to higher prices for intermediate energy goods, which climbed 3.6%. The index for intermediate materials less foods and energy rose 0.7%, while prices for intermediate foods and feeds were unchanged. This 0.7% advance was the highest since an identical rise in intermediate goods prices in March 2012. While this price increase would bear watching, note that about 80% of the February increase can be attributed to a 5.4% jump in prices for basic organic chemicals. A rise in the index for plastic resins and materials also contributed to higher intermediate core prices. At the beginning stages of production, the Producer Price Index for crude materials for further processing moved down 0.3% in February. For the 3 months ended in February, prices for crude goods advanced 1.9% compared with a 2.0% increase for the 3 months ended in November. The monthly decrease in February was led by the index for crude foodstuffs and feedstuffs, which fell 2.1%. Prices for crude nonfood materials less energy declined 1.7%. By contrast, the index for crude energy materials rose 2.2%. Note that the proportion of labor costs in the total cost of a good produced grow in importance as a product goes from crude, to intermediate and then to finished goods, and finally shows up in consumer prices. Unit labor costs in nonfarm businesses increased 4.6% at an annual rate in the fourth quarter of 2012, the combined effect of the 1.9% decrease in productivity and a 2.6% annualized increase in hourly compensation. At some point, companies might attempt to pass along those higher labor costs, unless they can introduce new productivity gains. Overall, core inflation remains relatively tame, especially given price increases that are concentrated in certain areas, though the twelve months increase in producer prices outside of food and energy is nearing the Fed's inflation target of 2%, though the Fed uses a different inflation benchmark of consumer, not producer, prices.