Smith Faculty Opinion Article	May 16, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

Producer Prices Rise 0.9 Percent in April
Gasoline Prices Keep Surging

Today, the Labor Department reported the Producer Price Index increased 0.9 percent in April, thanks to surging energy prices. The consensus forecast was 0.8 percent, and my forecast published by Reuters was 1.0 percent.

Core producer prices producer prices less food and energy rose 0.1 percent in April after rising 0.1 percent in March. The consensus forecast was 0.2 percent, and my forecast was 0.2 percent.

Gasoline prices surged in April. The average retail price of gasoline in April was $2.79 per gallon, up from $2.47 in March. By May 15, it hit $2.99. Gas prices are likely to go higher through the spring and summer driving season, and significantly burden economic growth.

Diesel prices are surging too. Diesel prices rose from $2.56 per gallon in March to $2.73 in April, and reached $2.92 on May 15.

Wholesale prices for finished consumer goods outside the energy sector rose a modest 0.1 percent in April after rising only 0.2 percent in March and falling 0.8 percent in February. These prices are up only 0.6 percent over the last 12 months.

Productivity growth remains solid. These gains have permitted producers of nonenergy products to absorb higher fuel prices and wage increases without pushing up prices for other finished goods, and to still enjoy increased profits.

The bottom line is that wholesale price inflation, outside the energy sector, remains in check, and the outlook for core consumer prices remains favorable.

Tomorrows consumer price data, which covers a broader range of goods and services, will further illuminate the inflation picture and the Feds options. Equally important will be May jobs growth and wage data. April jobs growth was low but wage increases were strong. Both figures were likely aberrations and the May figures should reflect a regression to the mean.

The broader indexes of inflation will be driven higher by surging petroleum prices. The Fed will want to make sure inflation is safely inside the bottle and the cork is firmly secured. On the basis of the data we have to date, look for the Fed to push the Federal Funds rate to 5.25 percent.

Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission.