The headline reads Producer prices unexpectedly jump 1.3%

Wholesale food and energy prices surged in February, pushing up the producer price index by an unexpected 1.3%, the Labor Department reported. The jump in the PPI reignited fears of rampant inflation and forced Wall Street to back off slightly on its expectations for aggressive interest-rate cuts. The market still expects a rate cut in August.

The increases in the producer price index for finished goods were broad based. Energy prices rose 3.5%, while food prices increased 1.9% and price for capital equipment were 0.3% higher.

Producer prices excluding food and energy were up 0.4%, twice the 0.2% gain in the core PPI that had been anticipated.

This “surprising” jump led to calls for stagflation nearly everywhere I looked. One interesting representation declaring stagflation to be the winner came from this humorous presentation by Kevin Depew on Minyanville. What follows is Ben Bernanke’s alleged entry into the Minyanville NCAA basketball pool.

Mish note:
Blogger shrinking of JPEG images sometimes leaves a lot to be desired. To see the image clearly, click on it, then click on it a second time to expand it.

Thanks Kevin and Minyanville!

Following is a table of the Finished goods PPI from the BLS.

As far as “March Madness” goes stagflation may be winning, but I am sure that Kevin and many of my other favorite professors on Minyanville know that this game is really a long journey and not a month long tournament. Todd Harrison stresses the journey nearly every day.

As far for the trend itself, I see no reason to suggest the overall trend in the PPI is anything but lower. I also see a whopping 8.9% increase at the crude level (raw materials) that did not get passed on to either the intermediate PPI or the final PPI.

But the inflation alarmists were out in full force on this news even as I am trying to figure out why anyone was surprised by these numbers. Let’s take a look at a couple of things… in proper context.

Energy PPI vs. Crude Prices

How can anyone possibly have been surprised by this? After all the crude and natural gas numbers were known long before the PPI numbers came out.

Crude Weekly Prices

Was anyone surprised by a bounce off the 200 day moving average?
If so why?


The treasury market sure was not surprised.


Corn has clearly been on a tear. So have food prices in the PPI. The correlation is not as strong as energy but it is there. But is this something the Fed is supposed to be concerned over? Even if so is this anything the Fed can do anything about?

My answers to those last two questions are, in order (perhaps, obviously not). Yes corn prices can filter into prices of chicken, hogs, and cattle. But why are corn prices rising? The most likely answer to that is misguided government policy regarding ethanol. I will try and take another look at ethanol policy soon, but it is basically preposterous to think that the Fed can control food prices via interest rate policy if the problem stems from a misguided ethanol policy caused by the Bush administration.

Therein lies the entire problem with a focus on prices (either the PPI or CPI) in the first place. The Fed wants everyone to think it has inflation under control when the Fed does not even seem to know what inflation is.

If the Fed concentrated on monetary policy (based on money and credit growth) instead of being concerned about micro managing prices and dealing with the aftermath of bubbles it creates, we would all be better off. In fact we would all be better off without the Fed period. In that regard, the PPI is nothing but a sideshow distraction. Nonetheless that’s where most of the eyes seemed to be focused today.

Mike Shedlock / Mish/