NEWS / Foreign Exchange

Food and Energy Price Hikes Lift Wholesale Price Index

The Producer Price Index (PPI) increased 1.0% in March following a 1.3% jump in February. Food and energy prices have accounted to a large extent for the overall gain in the wholesale price index in both February and March. The good news in March is that core finished goods prices held steady in comparison with a 0.4% increase in February. The energy price index moved up 3.6% in March after a 3.5% gain in February. The food price index rose 1.4% in March, following significant hikes in the past three months. Year-to-date, the food price index has risen at an annual rate of 18.7% and the energy price index has advanced 9.4%. In 2006, energy prices declined 2.0% and the food price index rose 1.8%.

The core PPI for finished goods was unchanged in March, after a sharp 0.4% gain in the prior month. A drop in prices for light trucks, toys, household furniture, soaps and detergents, lawn and garden equipment, and steady prices of cigarettes offset higher prices for cars, newspapers, and electronic equipment to leave the core wholesale price index unchanged in March. Year-to-date the core finished goods price index has risen at annual rate of 2.3% in March compared with a similar price gain in the three months ended December.

The intermediate goods price index rose 1.0% and the core intermediate price index excluding food and energy was up 0.2% in March. The core intermediate goods price index has risen 3.5% in the twelve months ended March, which shows a notable deceleration from a high of 8.4% in August 2006. To the extent that core wholesale prices are contained and core intermediate goods prices are moderating, the threat of troubling inflation is not significant. But, the upward trend of energy and food prices and the impact of a pass-through of higher energy prices present a risk.

Drop In Exports Is Bothersome

The trade deficit improved slightly in nominal terms in February to $58.4 billion from $58.9 billion in January. However, after adjusting for inflation the trade deficit of goods widened in February to $57.3 billion from $56.9 billion in the prior month. Effectively, the January-February inflation adjusted trade deficit for goods is wider than the average for the fourth quarter, implying that trade gap is likely to be a drag on GDP growth in the first quarter.

The 3.7% drop in inflation-adjusted exports is bothersome because exports were expected to provide some lift to economic momentum when internal engines such as housing and capital spending no longer provided support for economic growth. Exports dropped in March after a string of six monthly gains (see chart 4).

The weakness in exports of goods included declines in capital goods ($2.2 billion); industrial supplies and materials ($0.6 billion), consumer goods ($0.3 billion), and other goods ($0.1 billion). The drop in exports of capital goods is noteworthy because it is one of the components of exports that has accounted for the growth in exports in each of the past six months. The drop in imports was mainly from decreases in industrial supplies and materials ($3.9 billion), capital goods ($0.4 billion), and automotive vehicles, parts, and engines ($0.1 billion).

The trade balance vis-? -vis China ($18.4 billion vs. $21.3 billion) and Canada ($6.9 billion vs. $5.6 billion) narrowed in February. The trade deficit vis-? -vis the Euro area, Japan, and Mexico
widened.

Decline in Consumer Sentiment Index Reflects Higher Energy Prices

The University of Michigan Sentiment Index fell to 85.3 in the early-April survey from 88.4 in March. The overall index has fallen for three consecutive months. The Current Economic Conditions Index declined to 102.4 from 103.5 in March. The Expectations Index fell 4.4 point to 74.3. The rising energy price trend and weak labor market conditions are the factors accounting for the pessimistic outlook.