MarketWatch is reporting U.S. Nov. PPI 2.0% vs. 0.7% expected.

Producer prices rose by much more than expected in November, with the core producer price index rising by the most since July 1980, the Labor Department said. The November producer price index climbed by 2%, the biggest rise since November 1974, statistics show. Most of the gain in the headline producer price number was in energy prices, which rose by 6.1%. Of that, 17.9% was gasoline prices, while 14.6% was diesel fuel. Economists surveyed by MarketWatch were expecting the PPI to rise by 0.7%. They also forecast a 0.3% rise in the core PPI.

Following are a set of charts on the PPI for November 2006 from the BLS.

Finished Goods PPI

That was a pretty massive bounce in the finished goods PPI.
Is it sustainable?
Let’s start with a look at core PPI coming in at +1.3%.
From the BLS report:

The index for finished consumer goods excluding foods and energy climbed 1.1 percent in November following a 0.8-percent decrease in October. Accounting for the majority of this upturn, prices for light motor trucks increased 13.7 percent after moving down 9.7 percent in the previous month. The indexes for passenger cars and alcoholic beverages also turned up after October declines. By contrast, the index for pharmaceutical preparations declined 0.4 percent following a 0.5-percent advance in October. Prices for household appliances, sporting and athletic goods, and tires also moved down in November after rising in the prior month.

Prices for light motor trucks were up 13.7% accounting for a majority of the upturn?! Is that likely to happen again? In fact, did that really happen at all?

Intermediate Goods PPI

At the intermediate goods level there is an unmistakable trend in the core PPI.

Of course many will object to energy being stripped out of these comparisons so let’s take a look at the weekly chart of crude prices to see if we can shed any light on the situation.

Notice that we had a decent bounce off strong support at 55. Cynics everywhere expected a bounce after the election and sure enough we got one. Was it an election manipulation bounce, or a technical bounce or both? Whatever it was, the chart still shows a busted weekly trendline.

MarketWatch is reporting Crude futures fall under $62; natural gas near two-year low

January crude fell 31 cents to $61.90 a barrel in early trading, ahead of the contract’s expiration at the end of the session. February crude was down 31 cents at $62.48. January natural gas fell 10 cents to $6.975 per million British thermal units, trading under the $7 level for the first time since February of 2005 on forecasts for milder weather in parts of the U.S.

No doubt inflation alarmists will be sounding the bells over the raw PPI numbers while ignoring both the details and previous drops in the PPI. With natural gas futures near a two year low, with crude really not doing much more than putting in what appears to be a technical bounce, and with a huge portion of this PPI increase being based on a 13.7% increase in light truck prices, the November PPI is more likely to be an outlier than the start of a strong trend reversal back up.

Dr. Copper and lumber would seem to agree.

Copper

Click on the above chart for a better view.

Lumber

The treasury market did not have a strong reaction to the PPI report but to be fair it has taken a decent sized hit in the preceding week. It can now look for a much easier comparison next month just as it had a very difficult comparison this month.

CPI

So where was the passthru? OK. OK. So you don’t believe the CPI, and for valid reasons I don’t either.

Reasons to be skeptical about the CPI

  1. It is not possible to pick a representative basket of goods and services in the first place.
  2. Quality improvements and new products make it impossible to measure price changes in that basket with any reliability.
  3. Government manipulation.

Along with many others, I believe the CPI seriously understated both energy price increases and home price increases between 2001 and 2005. Since 2005 the CPI has overstated housing prices from my point of view.

Nonetheless the CPI provides one point of reference and in conjunction with the PPI, raw materials charts, housing, and retail stores data it is possible to have some degree of confidence in what is happening. In this case housing demand is still falling as are housing prices, lumber and copper have broken down, natural gas is close to two year lows, the weekly trendline on crude is solidly busted, Walmart is struggling and UPS is cutting back work force at Christmas as is Home Depot. Overcapacity is abundant in nearly all goods and services and consumer demand is clearly weakening.

With that backdrop a flat or even negative CPI makes sense. Thus the rising PPI is most likely a bounceback effect with a drop that was perhaps a bit overstated the previous few months. Looking ahead I see continued negative price pressures on account of weakening housing and weakening consumer demand.

Mike Shedlock / Mish/