Producer Prices Spike in March

By Brad Zigler

The other shoe dropped this morning when the U.S. Bureau of Labor Statistics released the latest version of the Producer Price Index. Wholesale prices for finished goods rose 0.7 percent in March, according to the Labor Department's green eyeshade division. Year-over-year, prices jumped 6.0 percent, the biggest advance since September 2008.

Factoring out volatile food and energy components to derive the so-called core inflation rate, finished goods prices rose only 0.1 percent in March. It was the 2.4 percent jump in food prices that contributed the most to the inflation spike.

No surprise there. Not at least for Hard Assets Investor readers (see "Weekend Meat Musings").

In March, meat was better than gold. Holders of the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSE Arca: COW) enjoyed a 3.1 percent return, while owners of the SPDR Gold Shares Trust (NYSE Arca: GLD) saw their share value slip 0.4 percent.

The question plaguing investors now is whether the March price hike is the first volley in an inflationary skirmish.

Year-Over-Year Inflation Metrics

There's no doubt that prices have rebounded from their mid-2009 trough. Consumers are rightfully worried about higher costs. Without a concomitant rise in earnings, there's a very real prospect of economic backtracking.

Producer prices, however, are notoriously volatile. You can see that on the chart above. The Producer Price Index for Finished Goods [PPI-FG] bottomed last July at a rate well below that of the Consumer Price Index [CPI-U].

The PPI food component is particularly capricious. Besides meat, the culprit in March was vegetables, which, due to weather and normal seasonality, were in short supply. The vegetable sector is likely to moderate as we move into the harvest season. Meat prices, too, are giving some indications of toppiness.

The broader perspective is reflected in the HAI Monetary Inflation Index, which has been a fair predictor of changes in the price indexes. If history is any guide, we're likely to see some moderation in PPI in the near term.

Still, you'll want to watch the daily updates in each Desktop column.