Implications: Due to a large increase in energy, producer prices increased 0.4% in October and are up 4.3% in the past year. However, those claiming deflation is a threat may point to the 0.6% drop in "core" producer prices as vindication. If so, they would be wrong. Instead, they should take the core PPI data with a big grain of salt. This is the fourth time in the past six years that the core PPI has dropped in October. On average, these October declines, have been offset with increases in November. This "creeping seasonality" in the data – where the government has problems predicting normal month-to-month variation in prices – may be due to how the government estimates prices of light trucks, which fell 4.3% in October. Looking at the rest of the report, core inflation was not subdued. Core intermediate prices were up 0.6% and core crude prices were up 2.1%. Overall intermediate prices are up 6.3% in the past year while overall crude prices are up 17.1%. Over time, some of this should filter through to prices for finished goods. Bottom line: the US is not experiencing deflation and the Federal Reserve remains too loose given economic conditions. More inflation will be the inevitable result.
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