Onwards and Upwards – Energy Price Rises Continue Unabated Pushing the Producer Price Index Higher in March

The Producer Price Index continued to advance in March, spurred by further growth in energy prices. The Bureau of Labor Statistics release of the Producer Price Index (PPI) reported that the PPI for finished goods rose a further 0.7% (SA) in March, extending its string of increases to nine months.  Over the past year, the price of finished goods has advanced 5.8% (NSA).

Core PPI, a more stable indicator of producer prices as it excludes the volatile food and energy prices, rose a moderate 0.3% in March. There has been a steady rise in the core PPI in recent months, with the index up 1% in the first quarter 2011 and 1.9% year-over-year.

Rising energy prices were again the main driver of PPI growth, accounting for nearly 90% of the increase in the finished goods index. Energy prices were up 2.6% (SA) in March. Over 80% of the March increase was attributed to the gasoline index, which climbed 5.7% (SA) during the month and is up 31.2% year-over-year. Futures markets indicate the prices of West Texas Intermediate and Brent are likely to peak in the next few months.  However, relief from high energy prices is unlikely in the near term, with futures markets indicating that oil prices will remain elevated through 2011 and much of 2012.

Finished food goods ended their six month string of price rises, with a modest 0.2% decline in March, following a sharp 3.9% rise in February. This pause in food price rises is likely to be short-lived, with a severe drought affecting much of the south of the United States, which will affect the spring harvest and is likely to drive further increases in food prices.

The index of inputs into residential construction rose 1.6% (NSA) in March and is up 5.7% year-over-year. There were notable increases in gypsum (+7.0%) steel (+5.3%), oriented strand board (+4.3%) and plastic products used in construction (1.5%). Most other building materials experienced a modest increase of 0.0% to 1.0%. The main exception was copper and copper products, which ended an extended period of eight consecutive rises with a 1.8% decline. The index for inputs into residential construction also includes petroleum products, so the index was also heavily influenced by the 14.1% (NSA) rise in regular gasoline and 11.1% rise in #2 diesel fuel.

The near term forecasts for the PPI reflects a continuation of the strong growth in oil prices experienced over the past six months.  However, once oil prices reach their plateau, the PPI will settle back with only modest increases expected through the second half of 2011 and 2012.



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