Slight Decrease In Producer Price Index For June Announced — What Does This Mean For The CPI-W?

Please Note: This is the Producer Price Index (PPI), not the Consumer Price Index (CPI). The Consumer Price Indices (CPI-U, CPI-W, and C-CPI-U) will be published tomorrow, July 15, at 8:30AM EDT. I will have my 2012 COLA Watch up tomorrow night.

The PPI is a measure of prices at the producer level (essentially the wholesale prices) for finished goods. It is usually a fair indicator of what the CPI will do.  Quotes (in italics) are from the Bureau of Labor Statistics’ news release.

The Producer Price Index for finished goods decreased 0.4% in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This decline followed increases of 0.2% in May and 0.8% in April.

In April, the CPI-W increased 0.78% and in May it increased 1.01%. There is not an exact correlation between the PPI and the CPI, but some portion of any decrease in wholesale prices may eventually make it through to consumers, although many retailers may keep their prices on the high side to make up for their losses due the rise in their costs over the last six months.

In June, the decline in finished goods prices can be attributed to the index for finished energy goods, which decreased 2.8 percent. By contrast, prices for finished goods less foods and energy and for finished consumer foods moved up 0.3 percent and 0.6 percent, respectively.

In other words, everything but finished energy is still going up.

Finished energy: The index for finished energy goods fell 2.8 percent in June, the largest drop since a 4.7-percent decrease in July 2009. In June, prices for gasoline moved down 4.7 percent and accounted for two-thirds of the monthly decline. Decreases in the indexes for residential electric power and liquefied petroleum gas also contributed to lower finished energy goods prices.

Finished core: The index for finished goods less foods and energy moved up 0.3 percent in June, the seventh consecutive monthly advance. Almost half of the June rise can be traced to prices for light motor trucks, which increased 1.6 percent. An advance in the index for plastic products also was a factor in higher finished core prices.

The cost of chemicals needed to make plastics increased.

Finished foods: The index for finished consumer foods rose 0.6 percent in June after falling 1.4 percent in the previous month. Accounting for almost sixty percent of this advance, prices for fresh fruits and melons increased 11.8 percent.

Analysts at Morgan Stanley predicted about a week ago that what they called the “headline” CPI would decrease 0.1%. If the CPI-W were to drop by 0.1% (remember the CPI-W only represents about 37% of the total population) this would mean a drop from 222.924 to 222.701, which would generate a COLA of 3.34%.

I think that Morgan Stanley is estimating a bit low. I think that the CPI-W will remain about where it is, or even increase a little. The decrease in the retail price of gasoline has bottomed out. The wholesale price of gasoline and the cost of a barrel of oil have both increased lately, and retail gasoline has just started to increase again — up $0.07 in the past week.

Anyway, we’ll all know what the CPI-W is tomorrow.

Don’t forget to call your Congressman, Senators, and the President to oppose changing the method used to calculate the CPI (*). Do it now, before they negotiate such a change into the final budget proposal.

(*) Please refer to my post Cola Crisis — Deficit Reduction Negotiators Considering A New, Disadvantageous Method For Calculating COLAs for details.

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