Implications: Producer prices declined 0.1% in September, the first decline for the index in over a year. Inflation is still in a long-term rising trend, but that process is going to be gradual, with many stops and starts along the way. As we noted in last week's Monday Morning Outlook, booming energy production is a key reason why headline inflation hasn't moved up more quickly. Producer energy prices fell 0.7% in September and are down 0.7% from a year ago, a testament to fracking and horizontal drilling. Largely as a result, producer prices declined in September and are up a modest 1.6% from a year ago. Still, through the first nine months of 2014, producer prices are up at a 1.8% annual rate, well above the 1.1% rate over the same period in 2013. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for intermediate processed goods are down at a 0.2% annual rate in the past three months, well below the 1.2% pace over the past year. Prices for unprocessed goods are down at a 20.0% annual rate in the past three months. But intermediate demand prices are highly volatile and we expect prices to move higher over the coming months. Taken as a whole, the trend in producer price inflation continues to move towards 2%, suggesting the Fed should continue on the path of ending quantitative easing later this month. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Loose monetary policy will eventually gain traction.
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