Producer Price Index Shifts Down as Energy Prices Ease (Finally!)

The Producer Price Index shifted down in June, as the recent decline in oil prices finally flowed through to producer prices. The Bureau of Labor Statistics release of the Producer Price Index (PPI) reported that the PPI for finished goods was 0.4% (SA) in June. Relief at last, following eleven consecutive monthly increases that have left the price index for finished goods up 7.0% (NSA) over the past year.

The energy index was down 2.8% (SA) in June. Gasoline prices were down 4.7% (SA – 9.1% NSA), accounting for two thirds of this decline. Decreases in the indexes for residential electric power (-2.0% SA) and liquefied petroleum gas (-1.9%) also contributed to the lower energy index. The decline in the energy index was anticipated after oil prices peaked in the last week of April. The price of West Texas Intermediate topped out at $113 per barrel and subsequently fell below $100 per barrel during the first week of May. Since then, however, oil prices have remained relatively flat, with minor fluctuation between $90 and $100 per barrel. We expect this trend to continue, with the price of WTI hovering in the neighborhood of $100 per barrel—and consequently keeping a lid on the energy index—for the balance of 2011.

All of the decline in PPI for finished goods can be attributed to the decrease in the energy index. Other components of the index increased, with the food index rising 0.6% and the core index up 0.3% in June. The increase in the food index was driven a strong rise in the prices of fresh fruits (+11.8%) and vegetables (+19.6%). These have been very volatile in recent months with the increase in June representing a bounce back from a sharp decline in May (-11.1% and -12.2% respectively). The modest rise in the core index (finished goods excluding the volatile food and energy prices) was driven by a 1.6% increase in light trucks and a 2.1% gain for plastic products. This is the seventh consecutive rise in core PPI, leaving it up 1.8% in the first half of 2011 and 2.4% on a year-over-year basis.

With the easing in energy prices, the composite index of inputs into residential construction was flat in June. This follows eight consecutive monthly increases, leaving the residential construction index 6.7% higher on a year-over-year basis. Moderate declines were observed for gypsum (-2.8%), plywood (-2.3%), steel (-1.7%), copper (-1.4%), concrete (-0.6%) and lumber (-0.5%). These were balanced out by increases in oriented strand board (+3.3%), asphalt roofing and siding (+4.0%), insulation materials (+1.7%) and plastic construction products (+1.5%).

The upward pressure on the residential construction index has eased now that energy prices are no longer rising. With housing demand continuing to bounce along the bottom, there is little price pressure on building products that are primarily produced and consumed domestically, such as concrete, bricks, gypsum, lumber and other wood products. Prices of internationally traded building products, such as copper and steel, have also eased over the past month on the back of falling global commodity prices. Uncertainty created by a new phase of the European sovereign debt crisis—problems reemerging in Greece and Ireland and concerns spreading to Portugal, Spain and Italy—has spooked financial markets and weakened global commodity prices. Overall, prices of most residential building products are likely to remain relatively flat or trend only slightly upward over the remainder of the year, although some month-on-month volatility can be expected.



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