HomeInflationProducer prices fall 1.9% in December, driven by lower energy costs

Producer prices fall 1.9% in December, driven by lower energy costs

Producer prices fell for the fifth consecutive month in December, as tumbling energy prices again led the decline, according to a Labor Department report released Thursday.

The Producer Price Index (PPI), which measures prices at the factory door and inflation pressures before they reach the consumer, fell 1.9%.

The December drop was in line with many expectations, yet slightly lower for other economists who forecasted a fall matching November’s 2.2% decline. The index registered its biggest monthly decline ever in October by falling a record 2.8%.

"The recession will continue through most of the year, and in this environment, producer prices can only move downward," Sal Guatieri, an economist at BMO Capital Markets in Toronto, was quoted at Bloomberg.

The energy index fell 9.3 percent in December after plummeting 11.2% in November and 12.8% in October, which set a 22-year record. Crude goods fell 5.3 percent compared to November’s 12.5% decline and October’s 18.6% drop.

The core PPI, which excludes volatile food and energy costs, increased 0.2%. That follows the 0.1% climb in November — a level many were expecting to see for December.

"More economists are boarding the deflation train," senior analyst Jon Nadler at Kitco Bullion Dealers commented Thursday. Deflation is essentially the opposite of inflation, with falling prices over a sustained period. Should prices continue to drop and reach below the cost it takes to produce them, production cuts, payroll reductions and resulting rising unemployment can follow.

"[PPI] Year-over-year is now deflationary," Kart Karl, Chief U.S. Economists, Swiss Re, New York was quoted at Reuters. That’s what I expect for CPI tomorrow. There’s a major drop off the cliff in inflation with big drops in food and energy.

“We are heading into deflationary environment in 2009. It’s the inversion of the energy and food price increases last year. I don’t think we’ll be back to inflation until 2010 so that’s not a major worry," added Karl.

The Labor Department’s Consumer Price Index (CPI) for December is scheduled for release Friday at 8:30 AM ET. The CPI measures inflation pressures at the consumer level.


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