Tuesday, December 19, 2006

Exaggerated Inflation Worries

Today's PPI report has led to some rather excessive fears about inflation this morning. Marketwatch reports:
WASHINGTON (MarketWatch) - Producer prices soared in November at the fastest pace in decades, pushed higher by rebounding energy prices and a quirky gain in car and truck prices.
The November producer price index climbed by 2%, the biggest rise since 1974, the Labor Department reported Tuesday. The PPI had fallen 1.6% in October.
If that makes you nervous, take a look at the following picture, which shows how the core and overall PPI have behaved this year.

Doesn't look so bad now, does it? It seems that October's figures were a bit of an aberration, and November's data simply corrected them. Over the past 12 months, the core PPI is up 1.8%, which is typical for 2006; with the exception of the odd behavior in the PPI over the past couple of months, the 12-month change in core producer price inflation has fluctuated between about 1.5% and 2% for the past year.

The moral of the story: don't take one month's data too seriously.

UPDATE: See Dean Baker for some similar sentiments, though with the opposite reading for what this erratic PPI data means about inflation.

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