Highlights include Freeport McMoran Copper & Gold, Inc. (
FCX) and Southern Copper Corp. (
PCU).
A specter is stalking the continent -- the specter of deflation. OK, maybe that's a little melodramatic, but today's PPI report does raise concerns that deflation could still prove to be a serious problem.
Total producer prices at the finished goods level declined 1.2% in March. This reverses the increases in January (0.8%) and February (0.1%). Those increases had followed five straight months where the headline PPI fell.
On a year-over-year basis, the headline PPI was down 3.5%, its steepest fall since 1950. This is a dramatic turnaround from what we were seeing last year, when the year-over-year change in PPI peaked at up 9.9% in July.
However, like the five declines from August through December, the cause was mostly falling energy prices. Stripping out food and energy prices to get core PPI, prices were unchanged in March. Energy prices fell 5.5% on the month and food prices were down 0.7%.
When we look farther up the food chain at the prices of intermediate goods, they fell 1.5% for the month and are down for the eighth month in a row on a headline basis and are down 0.3% on a core basis (six straight negative readings, but four straight months of smaller monthly declines).
Year over year, headline deflation at the intermediate goods level was 8.9%, also a dramatic reversal from its peak inflationary reading in July of 17.0%. Looking further back at crude goods, which are mostly just commodities, prices were still down, but at a much lower rate than we have seen recently.
On a headline basis, prices were down 0.3%, the eighth straight decline, but much closer to unchanged than the 4.5% decline registered in February, and far closer to unchanged than what we were seeing late last year, when the declines were in the double digits in three of the final five months of the year.
The year-over-year swing in prices at the crude goods level has been very dramatic. It currently stands at -39.0, in July it peaked at up 49.0%.
However, recently many key commodities prices have started to rebound. This suggests that the decline in crude goods prices is most likely coming to an end. One of the most important of these is copper, which is now over $2.10 a pound, well off its lows of under $1.50 just a few months ago (but nowhere near its highs of over $4.00 during the commodity boom of a year ago).
Not only is that good news for copper firms like Freeport McMoran (
FCX) and Southern Copper (
PCU), but it is good news for the world economy. Copper is often referred to as the metal with a PhD in economics, since it is used in everything that eventually uses electricity.
We will see tomorrow if the return of deflation at the producer level has been matched by consumer prices. While falling prices may sound like a good thing, they are really not. They put additional pressure on debtors, who are stressed enough as it is, and raise the likelihood of defaults.
That, in turn, is not good for creditors like banks. They hurt debtors since they have to repay with dollars that are worth more. Real interest rates go up, but there is not much that can be done to lower short-term interest rates since they are already near zero.
Overall, it still looks like deflation is a more serious near-term problem than inflation, despite the Fed throwing great gobs of money at the economy. Inflation may turn out to be a problem down the road, but probably not until the economy is back on track and expanding at a good clip.
Don't worry about inflation until probably late 2010 or 2011.
