The American economy's march to the edge of deflation continues...
Posted by DeLong at October 11, 2002 09:51 AM | TrackbackWSJ.com -- Reports from Briefing.com
* PPI came in 0.1% at both the headline and the core. Key Factors * Big jump in crude prices compare to weak gasoline price rise. * The new vehicle models provide a lift to the core -- through quality gains more than actual sticker prices. * Continued downward pressure on capital goods prices (-1% yoy). * -0.4% annual decline in the core is the strongest deflation in our 25 year history. * September decline to leave an annual drop of -1.9% for overall finished goods PPI. * PPI reached a 52 year low of -2.7% yoy in May * Pipeline measures (intermediate and raw materials) continue to show annual deflation. * Upturn in core crude goods prices (8.3% yoy) is not overly concerning as wholesalers/retailers absorb it.
Big Picture: Annual wholesale prices reached a half century low in May led by the drop in energy prices and the weak global economy. The annual core deflation is the strongest in at least 25 years. Deflation throughout the wholesale stages (raw through finished goods) argues against the risk of an upturn in consumer price pressures over the intermediate term. The drop has been dramatic as May's half century low of -2.7% contrasts with January 2001's decade high of 4.7%. The core (ex-food and energy) fell in to annual deflation in July from near 2% in early 2001. The only inflation concern comes from the stickier service prices (medicine, education, housing) seen in consumer prices. The need to guard against the risk of deflation is now the hot topic at the Fed.
PPI doesnt include services --- housing rents medical care, university tuitions, etc --- which are still rising in the CPI. Isn't the economy therefore seeing a relative price change (favoring services vs. goods) rather than outright deflation?
Posted by: Avery Shenfeld on October 11, 2002 11:20 AMStephen Roach discussed service sector pricing this week and concluded that we can no longer take for granted an insulation of the service sector from global competition. Services are increasingly "imported." IT services in India or Ghana, limit price flexibility in America.
There is less and less of an "inflating" effect from services in our economy. Service sector inflation may well not be sufficient to stop general deflating influences.
Posted by: on October 11, 2002 12:26 PMServices -- The Next Leg of Deflation
Stephen Roach (New York) [Morgan Stanley]
Although deflationary pressures are building in a US-centric global economy, there is still a sense that the aggregate price level will stop short of outright contraction. Central to that belief is the long-standing dichotomy between goods and services. Unlike the tradable-goods sector, which is increasingly exposed to the tough competitive pressures of cross-border trade, the so-called non-tradable services sector has long been shielded from such pressures. That was then. The globalization of services changes all that, and points to the possibility of a new leg of deflation in the United States and the world at large.
Posted by: on October 11, 2002 12:29 PM