The Producer Price Index (PPI) of Finished Goods rose 1.6% in February following a 0.8% gain in the prior month. A 3.9% increase in food prices and a 3.3% jump in energy prices explain a large part of the increase in the headline number. Higher prices for natural gas (+3.2%), gasoline (+3.7%) and heating oil (+14.6%) contributed for the noticeably higher energy price index. The February increase of food prices (+3.9%) is the largest since November 1974 (+4.2%).
The core PPI, which excludes food and energy, rose 0.2% in February, following gains in the December (+0.2%) and January (+0.5%). The year-to-year increase of the core PPI is 1.9% and it has moved up 3.9% in the last three months. These are not favorable readings. The key is the extent of passthrough to retail prices. In recent years, the passthrough from core wholesale prices to core consumer prices is weak (see Chart 2). Prior to the mid-1980s, there was a stronger positive relationship with wholesale and retail prices.
But the fact remains that higher costs of materials have to be accounted for or firms have to experience a reduction in profits. Margin squeeze cannot prevail for too long and higher wage costs also have to be considered. For the present time, the Fed is in a favorable spot with contained growth of wages and retail prices. Also, food prices have dropped in recent days, implying that the increase in food prices during March may not be repeated. The direction of energy prices remain less certain (see Chart 4).
Housing Starts Plunge in February, Outlook Remains Gloomy
Starts of single-family units fell 22.5% in February to annual rate of 479,000, virtually identical to the 477,000 low seen in April 2009. New construction for single-family units fell 11.8% to annual rate of 375,000 in February, which is close to the historical low of 360,000 registered in January 2009. Essentially, construction of new homes has failed to rebound from historical lows despite a recovery that is seven quarters old. On a regional basis, housing starts fell in all four regions of the nation, with the Midwest recording the largest drop (-31%). The number of permits issued for new single-family homes fell 9.3% to an annual rate of 382,000, while permits extended for multi-family units dropped 4.9% to annual rate of 135,000. These numbers bode poorly for housing starts in March. Overall, the housing sector remains mired in problems which are unlikely to be solved until there is rapid increase in hiring.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
