Incoming Inflation?

image provided by leschaco.com
image provided by leschaco.com

Reuters Article

The Labor Department said on Wednesday its producer price index rose 0.6 percent, the biggest gain since September 2012. That built on a March increase that was nearly as large.

Still, economists, who had expected only a 0.2 percent gain, saw the latest rise as an indication that price pressure may be building. Officials at the Federal Reserve have long worried that inflation was running too low.

In the 12 months through April, prices received by the nation’s farms, factories and refineries advanced 2.1 percent. That was the biggest gain since March 2012 and up from a 1.4 percent rise in the period through March.

My opinion: I don’t understand why so many negative comments are being made about these PPI numbers. Yes, they are higher than expected but they are still not higher than wanted. Also, this is one month! Let’s allow another month of unexpected inflation to occur before sounding the alarm.  By the way, Reuters didn’t go nuts, I’m speaking more specifically about a few talking heads on television.

So what is a more modest reaction to the PPI release? That menu prices on food is about to increase. This normally takes time however since changing menu prices costs money. Therefore, outside of small increases in the grocery store, all food prices will not increase for some time and after much more data. In economics we call these “sticky prices”.

Let’s also remember the Phillips Curve. Inflation is normally correlated with low unemployment. So hopefully we will see a significant dip in unemployment in the coming months as well.

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