Federal Reserve & Interest Rates

The Producer Price Index numbers(PPI) released today by the Department of Labor showed that prices for finished goods fell by 2.8% in the month of October.  The rapid decline in energy prices since July caused the biggest one month decline in the PPI ever.

The index for finished energy goods moved down 12.8 percent in October following a 2.9-percent decline in September.  Gasoline prices dropped 24.9 percent after falling 0.5 percent a month earlier.  The indexes for liquefied petroleum gas, diesel fuel, and residential electric power also decreased more than in the prior month. 

Prices for asphalt and finished lubricants turned down in October.  By contrast, partially offsetting the faster rate of decline in finished energy goods prices, the index for residential natural gas moved down 5.9 percent compared with an 8.2-percent decline in September.  Prices for home heating oil also fell less than in the previous month.

It’s been a roller coaster ride for oil since last fall, prices began to rise steadily, surpassing the $100 threshold at the beginning of the year and reaching a peak in mid-July close to the $150 mark.  However, oil’s fall from it’s lofty heights has been even faster than it’s meteoric rise.

For nearly a year much of the world was concerned over skyrocketing energy and food prices and the inflationary pressures it placed on other sectors.  Now the opposite is true as economies begin to shrink across the globe.

While many people are welcoming the lower gas prices once again, the sharp fall in prices alludes to a growing problem the economy is facing, falling demand.  The major concerns going into next year will be deflation and the steadily rising unemployment rate.

Many industries are facing an uncertain period where their very survival could be at stake.  The auto industry never really fared too well even in good economic times.  In the current climate, it faces bankruptcy which will mean the loss of millions of jobs. 

There are also conflicts on how best use the second half of the $700 billion rescue package.  The Treasury has put a band aid on the financial system for the time being but the list of troubled areas keeps growing.

One of the fist acts of the new administration will likely be the passage of a new stimulus package which some are estimating will be over half a trillion dollars.  Whether it will be enough to spur demand remains to be seen.

On Tuesday, the Labor Department released it’s numbers for the Producer Price Index(PPI) for the month of April.  The price of finished goods rose .02%, while economists were predicting a .04% rise, a sharp drop off from the 1.1% increase in March.

While on the face of it the numbers look favorable, core PPI which excludes food and energy prices, rose .04% which was higher than expected.  These numbers fuel the growing fear that inflation may be creeping into other sectors of the economy.

Food and energy prices had a relatively flat month after soaring in March.  Much of that can be attributed to the general consensus that the Fed would ease it’s aggressive stance on interest rates, thus slowing the fall of the dollar in currency markets.

However, while food prices have stabilized somewhat, oil prices continue to hit record highs this month, with many analysts predicting it will surpass $150 a barrel before the end of the year.  While economic growth is still sluggish and financial markets have yet to recover, there may be increased pressure on the Fed to raise rates in the near future.

If that were to happen and the dollar starts to rise, it could spur profit taking from commodities traders and send the price of oil falling toward the $100 a barrel mark.  The other central banks of the world have resisted lowering rates in the face of slowing economic growth which has had a negative impact on the price of the dollar.

It will be a tough balancing act for the Fed and while economic growth remains their top priority, rising inflation is becoming more and more of concern.