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January 12, 2001

PPI Unchanged In December
By Rex Nutting,

Inflation Is Back And It's The Worst In A Decade! ... Weiss comments

WASHINGTON - Producer prices were flat in December while the core rate of inflation at the producer level jumped a surprising 0.3%, the Labor Department said Friday.

The PPI rose 3.6% in 2000, the biggest rise in 10 years. Most of the gains for the year were for energy goods and services, which rose 17.1%. The core rate, which excludes food and energy prices, increased 1.2% for the year.

Wall Street economists surveyed by expected both the PPI and the core PPI to rise 0.1%.

In December, energy prices fell 0.7%, despite a record 6.9% rise in natural gas for residential heating. Gasoline prices dropped 8.4% and heating oil prices fell 1.2%. Electricity costs jumped 1.2%.

Food prices dropped 0.4%.

The 0.3% rise in the core rate can be traced to several sectors. Light truck prices soared 1.4%, car prices rose 0.5%, prescription drug prices climbed 0.6% and alcoholic beverage prices rose 1.2%.

Finished capital goods prices rose 0.2%, bringing the annual increase to 1.2%.

Further back in the production pipeline, the story was much the same: tame inflation other than the historic gains in natural gas prices. Natural gas rose a record 33.9% at the intermediate level and 35.3% at the crude level.

At the intermediate level, prices rose 0.2% in December and 4.1% for the year. The core rate, however, was flat in December and rose 1.6% for the year.

Crude goods prices rose 8.7% in December due to the natural gas price spike. The core rate for crude goods was flat.

For the year, crude goods prices gained 31.6%, largely due to the record 76% rise in energy goods prices.

The Labor Department can try to spin this all it wants, but the latest data hammers home that inflation is still surging. The 0.3% increase in the core rate of the PPI shocked economists, and it confirms what we've been saying all along: Inflation has not disappeared from the stage.

What's most significant is that the rise in producer prices is no longer isolated to energy and food prices. That means we will undoubtedly see higher costs incurred by producers being passed along to consumers.

High energy prices continue to be the prime player in inflation. Oil costs have dropped off slightly, but the 76% rise in crude energy goods prices last year is oozing through the economy and pumping up the prices of other goods. What's more, last month's natural gas shock will reverberate in the price of goods for months to come.

The increase in the PPI for 2000 reached its highest level in a decade. In 2001, inflationary pressures will likely lead to "stagflation," as businesses try to boost earnings by increasing prices and cutting jobs while nervous consumers slam their wallets shut -- sending the economy further into a recessionary slump.

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