Producer Prices Contract: Is Deflation Catching Up With the Fed?

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Inflation appears to have evaporated from the U.S. economy. On Friday, the Bureau of Labor Statistics reported that its seasonally adjusted producer price index for finished goods declined 0.1 percent in November, its third consecutive sequential contraction. The headline finished goods index is now up just 0.7 percent on the year, indicating that price pressures in the pipeline are weak at best.

The PPI interprets price changes from the perspective of the seller and can be used as a leading indicator of inflation because it measures input price pressure. While popular indexes of prices such as the Consumer Price Index and the Personal Consumptions Expenditures Price Index measure the change in prices that consumers pay for goods they buy, the PPI measures the change in prices that the sellers/retailers of those goods pay to wholesalers and producers.

The producer price index report is broken down into three broad sections: crude goods, intermediate goods, and finished goods. The finished goods component is closest to the consumer, and the crude goods component is farthest away. Price increases at any stage of production can sometimes be passed down the line and could ultimately reach the consumer, as reflected in CPI and the PCEPI.

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