HardAssetsInvestor

Written by Brad Zigler  |

April 14, 2009

PPI And Monetary Inflation Offer A Glimpse Of The Future

Details

You don't have to go to a psychic or a palm reader to get a forecast of your future. A glance at some of the government's wholesale price indexes can tell you with reasonable certainty where prices are headed some three months out. Stay with me; I'll explain.

This morning's release of the U.S. Bureau of Labor Statistics' (BLS) Producer Price Indexes (PPI) showed a deep slump in the prices of finished goods, mostly attributable to food and energy costs. Wholesale prices fell 1.2% last month, following a 0.1% increase in February and a 0.8% hike in January. Without the effect of volatile energy and food costs, the so-called "core" index for finished goods was flat in March, after rising 0.2% the previous month.

Year-over-year, finished goods prices fell 3.5% in March, a much deeper decline than the 1.3% slippage posted in February.

Among finished goods, energy prices decreased 5.5% in March following a 1.3% hike the previous month. The PPI for finished consumer foods dipped 0.7% last month on the heels of a 1.6% decline in February.

We keep pretty close track of wholesale energy prices at Hard Assets Investor, so it's the food price trends that particularly interest us.

For example, we've noted from recent PPI data a three-month lag between pivotal changes in farm prices and finished food prices.

PPI Farm Prices Vs. PPI Finished Consumer Food Prices

Obviously, the prices of goods at a crude stage of production are more volatile than those of finished products, but the influence of farm prices in the food value chain is pretty clear. Farm prices are the leading edge of the current disinflation trend.

Mindful of that, we publish our monthly Breakfast Index – a futures benchmark of eight common breakfast food items – to coincide with the release of the BLS's Consumer Price Index (CPI). Tomorrow, we'll update out Breakfast Index for March.

You needn't wait for monthly updates, though, to get your inflation bearings. Every day, in this column, we publish a real-time gauge of monetary inflation as a subheading. Our last reading, at 7.8%, may look high when compared to the CPI and PPI numbers, but there's a reason for that.

Our number measures monetary, not price, inflation. We're essentially metering the velocity of dollar degradation in the global marketplace; we're not measuring changes in the domestic costs of foodstuffs or gasoline.

The number sitting in the subhead may seem large, too, because it lacks context. Does the 7.9% rate reflect an increase or decrease in the rate of monetary inflation? It's impossible to tell unless you've been following the metric over time. Well, a picture's worth a thousand words, so here's a chart of the recent trend to catch you up:

U.S. Monetary Inflation

As you can see, monetary inflation has trended lower over the previous 12 months, long before the banking collapse brought on whispers of the "D" word. The metric was an early warning sign of disinflation to come.

Producer price inflation may lead consumer prices higher, but monetary inflation is at the head of the parade.

You'll also note what appears to be basing off the 7% level. Just as our metric was a harbinger of the downward trend in prices, we'd expect it to herald the reflation trade.

Month-by-month this year, the rate of monetary inflation not only slowed, it reversed. The annualized rate of inflation decreased 2.1% in January, slowed another 1.1% in February and, in March, actually rose 0.8%.

That ought to make April a very interesting month.