February 16, 2001

U.S. Producer Prices Unexpectedly Surge in January
By Siobhan Hughes, Bloomberg

Inflation is Alive and Kicking ... Weiss comments

WASHINGTON - The U.S. producer price index rose in January at the fastest rate in more than a decade, led by record increases for natural gas used to heat homes, power factories and make electricity.

The index of prices paid to factories, farmers and other producers rose 1.1% last month after rising 0.2% in December, the Labor Department said. Last month's increase was the largest since the index rose 1.3% in September 1990, when the Persian Gulf crisis drove up oil prices. Food costs surged last month, led by increases for fruits and vegetables.

The core index, which excludes energy and food costs, rose 0.7% in January after rising 0.1% in December. Higher costs for paper products, passenger cars and cigarettes paced the increase, the largest since a gain of 1% in December 1998.

The report "does raise some warning flags" about accelerating inflation, said Peter Kretzmer, an economist at Banc of America Securities in New York. Still, he and other economists don't see the increases showing up in retail prices. Federal Reserve policy makers are more likely to be focused on making sure the economy doesn't slow too much, economists said.

Dealer incentives were keeping retail auto prices in check, while cigarette prices reflected legal costs rather than an increase in demand, economists said. A Fed report today showed reduced demand for automobiles pushed industrial production down for a fourth consecutive month in January.

Even so, some producers are trying to push through price increases. Bowater Inc., Abitibi-Consolidated Inc., and other newsprint producers have said they plan to raise prices by $50 a ton on March 1. Newspaper publishers say there is no room for the price increase, with publishers including Gannett Co. citing a slowing advertising market.

Just last month, we told you that Inflation Is Back And It's The Worst In A Decade! This month's producer price index confirms it.

Still, economists and Fed policy makers choose to ignore inflation. They won't be able to do that for long. There is growing evidence that the increase in producer prices will be passed along to consumers - no matter what Alan Greenspan says.

The reason: as businesses absorb these higher prices, their profits vanish. And we've seen what investors do to a company's stock when dismal earnings reports come to light. The stock gets pummeled.

It's not only higher prices that cut into a company's bottom line. We also see that labor costs are increasing by leaps and bounds every month. Wage inflation pressures companies to either raise prices and lay off workers or face an angry mob of shareholders.

But companies are caught in a Catch-22. In a slowing economy, both layoffs and price hikes are lethal to the economy. Consumer confidence is already down in the dumps. Massive layoffs and higher prices will curtail spending even more - sending earnings even lower. And more interest rate cuts won't help the matter. Faced with higher prices and the threat of unemployment, lower interest rates won't be enough to entice consumers to go on the spending spree that businesses need.

The economy is on a downward path toward stagflation - a combination of stagnation and inflation. It could be years before business, consumer, and investor sentiment recover.

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