Transcripts

The PPI Feeds on the Latest Inflation Numbers

SUSIE GHARIB: On Wall Street today, investors reacted to a surprisingly strong report on inflation. The latest producer price index rose sharply for the second month in a row. Erika Miller takes a closer look at whether inflationary pressures are heating up.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Many economists were stunned by the sharp increase in wholesale inflation. Producer prices shot up .9 of a percent, almost double expectations. That comes on top of a 2 percent increase in November. The so-called core rate rose a more moderate .2 of a percent. That was also more than anticipated. Because it factors out volatile food and energy costs, the core rate is considered a more reliable inflation gauge.

Much of the increase in the overall inflation rate came from a 2.5 percent gain in energy costs. But some economists think that increase was exaggerated by the government's seasonal adjustment process, which anticipates lower fuel costs this time of year. The government's survey also took place early in the month, before the big drop in energy prices. The cost of food also surged during December, rising almost 2 percent. Economist Cary Leahey of Decision Economics says that's a more troubling development.

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: Grain prices are certainly up and I think there will be some real food price inflation, meaning food prices rise faster than the overall rate of inflation. But I'd be surprised if that was more than a six-month worry.

MILLER: For the first time in several months, vehicle prices had little impact on the PPI. Light truck prices rose .7 of a percent, while cars fell .2 of a percent. Most economists don't think today's report will sway Federal Reserve policymakers one way or the other when they meet in two weeks. The central bank is widely expected to leave short-term interest rates unchanged at that meeting. But some economists, including Conrad deQuadros of Bear Stearns, think the central bank will opt to raise rates later this year.

CONRAD DEQUADROS, SR. ECONOMIST, BEAR STEARNS: Our feeling is that by perhaps the early summer, the Federal Reserve might nudge rates higher by another 25 basis points. Then potentially later on towards the end of the summer, early fall, we might see another 25 basis point rate hike.

MILLER: When it comes to inflation, policymakers are more concerned about what happens to prices at the retail level. Economists say the Fed will pay close attention to the government's consumer price index due out tomorrow. Erika Miller, NIGHTLY BUSINESS REPORT, New York.