Truck Price Pressure Drives Core PPI Lower
Today's data release got the party rolling: Core PPI (excluding food and energy) fell 0.3%, the first such drop since October '05. Stocks rallied, as did Bond prices, driving yields down 75 bps across the curve.
A closer look reveals how this happened: Vehicle prices fell 2%, with Car prices down 0.8%. But the real action was in dropping Light Truck prices: Given Q2 surge in Oil and gasoline, its no surprise that light truck prices fell 3.1%. I expect to see this metric to be under continued pressure for the foreseeable future.
The drop in Car and Truck prices accounts for nearly the entire decline in the core PPI.
Prices for oil and other materials continue to rise; WSJ noted that "Deeper in the production pipeline, prices increased. Prices of raw materials, also known as crude goods, rose by 3.1% in July after declining 1.7% in June. Intermediate goods prices increased 0.5% after climbing 0.7% in June."
Prices of metals and chemicals continued to rise. These price increases include a 4.8% rise in energy materials, and a 1.3% gain in prices of industrial materials.
And, as we learned last week, productivity growth is slowing.
>
The bottom line is that this is a far less benign number than would appear at first blush.
>
UPDATE: August 15, 2006 12:47pm
Mike Darda points to these Bloomberg charts:
No inflation to see here, move along . . .
UPDATE 2: August 15, 2006 3:37pm
The great irony here is that because GM can't move their trucks due to their lousy fuel economy, they have to offer big discounts -- i.e, rebate/mark them down.
The sale prices of poor selling trucks makes it appear that there is no inflation, when what we actually have is everyone thinking inflation is going away -- so naturally the markets rally.
Hence, by being unable to sell their 10MPG trucks, GM's stock price actually rises!
>
Sources:
Producer Price Indexes
BLS, July 2006
http://www.bls.gov/news.release/pdf/ppi.pdf
Core Wholesale Prices Decline, Suggesting Inflation Is Easing
BENTON IVES-HALPERIN
WSJ, August 15, 2006 9:34 a.m.
http://online.wsj.com/article/SB115564422383336075.html
Core wholesale prices fall 0.3% in July; Core intermediate PPI up 7.9% in past year
Rex Nutting
MarketWatch, 10:21 AM ET Aug 15, 2006
http://tinyurl.com/o9kjr
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» Behind the Headline from Bear Mountain Bull
We can count on Barry Ritholtz to flush out the gory details behind the mornings PPI number:
Todays data release got the party rolling: Core PPI (excluding food and energy) fell 0.3%, the first such drop since October 05. Stocks r... [Read More]
Tracked on Aug 15, 2006 1:51:17 PM
» PPI + CPI = SOS from John Mugarian Investor Alert
That's right, if you break down the numbers, add in all things inflationary, you come up with the "Same Ole Stuff". As for the PPI numbers released yesterday, Barry Ritholtz at "The Big Picture" (www.bigpicture.com), did an excellent job of... [Read More]
Tracked on Aug 16, 2006 9:56:04 AM
Comments
You mean our economy's stability isn't hinged on the price of light trucks?!
Posted by: sell_the_ten_year | Aug 15, 2006 11:33:10 AM
"Given Q2 surge in Oil and gasoline, its no surprise that light truck prices fell 3.1%"...and this points out a problem with measurements like "core inflation." If you exclude fuel costs but keep transportation costs, then you are measuring a cost factor than benefited from higher oil prices, but not thecountervailing cost factor that caused this benefit!
Posted by: david foster | Aug 15, 2006 11:41:03 AM
Far less benign number? Ha.
Personally, I have no home, health insurance, or heating bills. And I buy a few light trucks a month to boot.
So this PPI is soooo me.
Posted by: Michael C. | Aug 15, 2006 11:50:48 AM
OK Michael you beat me.
Posted by: me | Aug 15, 2006 11:56:06 AM
just sell the strength.... and keep doing so until proven wrong.
Posted by: emd | Aug 15, 2006 12:01:14 PM
PPI - Jul06
Commodities Equipment Finished
Value 167.1 146.4 162.0
1Mo% 0.7% -0.3% 0.2%
12Mo% 6.9% 1.4% 4.2%
In case anybody's interested in the actual data what was reported as PPI was the finished goods PPI index. The others for 'All Commodities" and 'Equipment/Intermediate Goods" are shown above. Notice that monthly % change all up was 0.2% but the 12Mo (YOY) % increase was 4.2% (which btw matches the same YOY for the CPI).
Without interpretation, interpolation or de-construction that looks to me like actual inflation is running about 4.2%. At least IMHO - what am I missing here ?
Worse input costs, through dropping this month, are running significantly higher at 6.9% which means the pressures there continue to build AND/YET everybody in the middle is getting trimmed from both sides because their prices aren't staying up with (which means that everybody's margins are absorbing the cost increases).
Now given that nobody appears to be looking beneath the headlines let alone at the data how do we all find the right musical chair to sit in when the music stops ? :) !
Posted by: DBLWYO | Aug 15, 2006 12:20:34 PM
DBLWYO: didn't you know? They changed the rules of the game.
The music never stops!
Posted by: babycondor | Aug 15, 2006 12:32:14 PM
Has anyone out there priced car/ truck tires lately? Bought a quart of castrol GTX 20-50 wt oil lately? What happened to the $0.99 specials...I have all these copons. Now, on sale>> $3.09.
Posted by: snook | Aug 15, 2006 1:02:39 PM
So light truck sales = 1% rally in the markets?
Go figure.
You would think light truck sales merely acknowledge the high gas prices and its impact on the consumer/economy. But that's thinking too hard and being too realistic it seems.
Buy on!
Posted by: Michael C. | Aug 15, 2006 1:03:08 PM
Has anyone out there priced car/ truck tires lately? Bought a quart of castrol GTX 20-50 wt oil lately? What happened to the $0.99 specials...I have all these coupons. Now, on sale>> $3.09.
Posted by: snook | Aug 15, 2006 1:03:46 PM
>>>No inflation to see here, move along . . .<<<
That's right. Why are your charts upside down. Please correct them.
Posted by: Michael C. | Aug 15, 2006 1:12:27 PM
Being mindful of the light truck component, which interest rate is truly having an effect? 4%? 4.5%? Figure a 6 month lag, perhaps the Fed has found the sweet spot. Tomorrow will be interesting, as will next month's reports.
Posted by: Ch | Aug 15, 2006 1:21:15 PM
Glorious news! Our Homeland's economy, under the wise guidance of the diligent Leader BUSH, has blossomed!! The Monies have grown for ALL! And so the People rejoice at the Stewardship of Leader BUSH and his able Lieutenant, Bernanke!!
Posted by: Brion | Aug 15, 2006 1:31:53 PM
Inflation numbers sway up and down. Next month the core PPI could be up .5%, what did July mean, absolutely nothing.
The market needs to stop spraying on every little number. It is the general trend of things. Yet, children will act like children.
Posted by: Cherry | Aug 15, 2006 1:33:42 PM
My recommendation about the best way to watch numbers such as the PPI is to look at the year over year percentage change rather than the individual one month numbers.
The Bureau of Labor Statistics makes it easy for anyone to take a look for themselves at:
http://data.bls.gov/cgi-bin/surveymost?wp
Then pick the metrics you are most interested in and select Retrieve Data (e.g. finished goods, all commodities and #2 diesel)
You'll get a 10 year table of data for each item you select but these will be the raw numbers and not very useful. So select More Formatting Options.
On the next page, uncheck Original Data Value and check 12 month percent change. You can also adjust the time period, e.g. from 2001 to 2006. Make sure you also check Include Graphs.
Then select Retrieve Data again and you will be able to see the graphs showing the trends for each of metrics you have selected. You'll also get a table showing each month's year over year percent change so you can read out the exact value for each month.
Also, related to Barry's previous post about precsion vs accuracy, by using year over year percent change, you end up with 2 significant digits in most cases which is just about right even though the one month numbers reported are only to a single significant digit.
If we could come up with a short list of the 10-30 most important PPI submetrics and present them in this way, it would make a lot more sense than trying to read the text and table version that the BLS publishes each month at: http://www.bls.gov/news.release/pdf/ppi.pdf
Posted by: Trend Watcher | Aug 15, 2006 1:52:31 PM
My thesis: Deflation in glutted items: cars, trucks, homes, anything imported from China. Inflation in everything else: health care, food, medical. Which means? Monetary inflation will show up somewhere. The government will adjust accordingly to make things look good. Get used to the madness.
Posted by: Mike M | Aug 15, 2006 1:55:33 PM
Patience... Patience... My wallet speaks louder than all the statistics on earth... Has anyone seen the price of Beluga lately... My God...! What's a girl to do....? Speaking of girls, how about the price of a good hooker.... Geezzzzz! What's a boy to do...?
Posted by: albiegf13 | Aug 15, 2006 2:00:49 PM
hello from germany,
has anybody seen the take from cramer on the arm problematic. unbelivable.
worth reading. please raed alo the quotes from itulip from cramer in the dot.com days.
the quotes to the arms desserve to put in the same camp
http://immobilienblasen.blogspot.com/2006/08/
cramer-wie-zu-dotcom-zeiten.html
Posted by: jmf | Aug 15, 2006 2:00:51 PM
"Consumers have been spending more than their disposable incomes for the past year, in part by taking out equity from their homes."
For the last year? Try five years. Did they actually
pay the guy to write this?
Marketwatch "http://www.marketwatch.com/News/Story/Story.aspx?guid=
%7BC63296BD%2D60D8%2D44B9%2DAFEC%2DE60DE1D70D47%7D&siteid=
myyahoo&dist=myyahoo
Posted by: Bob A | Aug 15, 2006 2:02:12 PM
Barry,
Isn't it your position that it's wrong-headed to focus on a core figure that excludes food and energy? On the other hand, if a different category (cars and trucks) accounts for most of a big drop, then maybe we should discount that component? Is that this the beginning of a new "BarryR core inflation rate?" It includes food and energy, but excludes cars and trucks.... ;-)
Seriously, it is not my point that you are wrong about inflationary pressures or the governments accuracy in measuring inflation. (Though you seem to be rather selective in that criticism. At 7am, you called the official figures that contradicted your view "nonsensical." Four hours later, you cite figures coming from the same government agency that you feel buttress your case....)
I am a skeptic, so I take it on faith that the official figures on inflation are almost certainly inaccurate. But what do you offer in their place?
Yes, commodity prices have jumped up and created a lot of pressure in the pipeline. On the other hand, wages haven't even kept up with inflation and job creation has been anemic. Probably 200,000 fewer homes will be constructed this year, with another drop likely next year. Won't that put some downward pressure on commodities like cement, copper, etc.? Isn't it almost a certainty that the amount of energy required per $ of GDP is going to go down around the globe, particularly in China, India, etc.?
Personally, I see the greater danger in a drop-off in demand by consumers, particularly in the U.S., but in all the debt fueled economies--the UK, Spain, Australia, Italy... If that happens, commodity prices will likely become a downward pressure on prices.
Posted by: Bob_in_MA | Aug 15, 2006 2:11:50 PM
Spiraling deflation=Helicopters get ready.
The fact that Bernanke was named FED chairman after Gov. Strong, er I mean Greenspan is supsicious and the bankers aren't stupid. They know whats coming.
Posted by: Cherry | Aug 15, 2006 2:15:42 PM
Bob --
its my position to want to identify what is happening in reality, and adjust accordingly.
Today's data is a perfect example: Are prices rising or falling, and why?
It turns out most prices (energy, materials, internmediate goods) are rising, but one particular subset -- Cars in general, and light trucks in particular -- are falling.
Why are light truck prices falling? BECASUE THEY GET LOUSY GAS MILEAGE AND GAS IS NOW $3.39 PER GALLON.
So we have the irony of energy inflation driving fuel prices up, and therefore reducing demand for poor MPG vehicles.
And GM, Ford and Chrsyler must cut their prices to move the sheet metal off the dealer lots.
Thus, rising inflation in general has led to the appearance of declinging inflation.
Capiche?
Pop the champagne if you want, but don't say it wasn't explained to you . . .
Posted by: Barry Ritholtz | Aug 15, 2006 2:27:28 PM
Barry,
"The drop in Car and Truck prices accounts for nearly the entire decline in the core PPI. "
Can you please quantify this? thx
Posted by: ss | Aug 15, 2006 2:33:24 PM
TrendWatcher: excellent point. It is, roughly the proceedure I followed to generate the 'real data table' on PPI. You can also download as much data as you like to Exel and do your own YOY% analysis and graphs.
BobinMA, BR, et.al.: as TW implies out the YOY% changes pretty much wash the noise and allow one to see trends, change rates and (the very most difficult) turning points. If one goes to the BLS data site they in fact put out a dashboard on the PPI for many commodity and industries any one of which can be dove down on.
Given the data is what it is and is about as good as we're going to get there really aren't affordable alternatives but examing the patterns really tells you, IMHO, about all you really need to know.
And represents an information advantage - speaking of inefficient markets. Just think we've got nearly 2% one day jumps in major indices that're readily shown to be 'false-to-facts' of the brutal realities (as Jim Collins calls it). So why are folks and Mr. Market ignoring that data and as the music plays on can we exploit it ?
Posted by: DBLWYO | Aug 15, 2006 2:52:28 PM
From MarketWatch
NEW YORK (MarketWatch) - Deere & Co. said Tuesday its third-quarter net income rose 13% as it raised prices on its agricultural equipment and benefited from better sales of its landscaping, construction and forestry machines.
Nope no inflation here - just raising prices.
Posted by: beechdriver | Aug 15, 2006 3:11:11 PM
