Producer Prices And Energy Prices

Producer prices fell 1.9 percent in April, at least as a first estimate. Much of that fall is due to energy price declines, the biggest in 17 years. As Reuters reports it:

Excluding food and energy costs, the core PPI fell 0.9 percent in April, compared to a rise of 0.7 percent in March.

The fall in the April PPI, which is a measure of prices received by producers, is the largest one month decline on record.

The Reuters article then goes on to quote some bond and foreign exchange analysts on the importance of the report. Generally, they do not perceive this as a deflationary problem (thank goodness, because I remain unconvinced that deflation is a problem, largely with the skepticism that Kevin Brancato expresses.

This Smart Money article gives more in-depth details on the components of the PPI and their movements.

And if you want to read the report for yourself, it’s here. Note, importantly, that these numbers are seasonally adjusted, which is really important when you’re talking about things like energy.

Of course, I think we have to take all of this stuff with an enormous grain of salt. Such aggregation is, in many ways, meaningless (now I’m showing my Austrian microeconomist stripes!). I think a lot of these price indices are estimates with standard errors so big you can drive a truck through them, but, as with trade deficits (which are also both theoretically and substantially meaningless), people who like to get their hands in and mess with economic policy pay attention to them, certainly more than they should.

Other people who pay attention to such estimates, and who I argue give them more of their appropriate due, are investors. So how are capital markets responding to this report?

Stocks gain at open
Investors bid up shares early Thursday on comments from IBM, drop in jobless claims, PPI

So it’s not a controlled experiment, where we can evaluate only the effect of the PPI report on Wall Street. But that’s the whole point. Unemployment fell last week, IBM thinks that technology markets are going to stop roiling, and producer prices have fallen. Nothing in economics ever happens in isolation except on the blackboard.