Intro of new car models pulls down core producer prices

Led by a 3.7% rise in energy prices, the Producer Price Index increased a modest 0.4% in October. The index rose 4.3% versus a year ago. 

But core prices, which remove the volatile food and energy category, tumbled 0.6% last month amid a steep drop in auto prices.  Core prices are up a modest but non-threatening 1.4% versus one year ago (see chart below).



Blame the steep drop last month on difficulties in accounting for seasonality that comes from the introduction of 2011 autos.  Looking back at October 2009, core prices also tumbled, indicating that the one month drop is very likely an aberration and not the beginning of a new trend.



Given recent strength in commodity prices that have been tied to stronger demand from overseas and QE2-fueled speculation, intermediate prices (see chart above) continue to steadily gain ground, while core goods (see chart below), which are especially sensitive to changes in demand, remain in a steady upward trend.



Demand in the U.S. economy remains sluggish, making it difficult to substantially raise prices, and wages, which are the largest expense for most businesses, are rising at a very gradual pace.  Consequently, retail inflation is likely to remain under control in the near term.