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

Producer Prices Rise Only 0.1 Percent in July Nonenergy Prices Drop

Today, the Labor Department reported the Producer Price Index increased 0.1 percent in July, after rising 0.2 and 0.5 percent in May and June.

Food prices fell 0.3 percent and energy prices rose 1.3 percent. These components of both producer and consumer prices are quite erratic month to month, and Fed policymakers pay particular attention to movements in the core indexes.

Core producer prices producer prices less food and energy fell 0.3 percent in July, after rising 0.3 and 0.2 percent in May and June.

The 0.3 percent decrease in food prices in July should be viewed together with the 1.4 percent increase in June and 0.5 percent decrease in May. Overall, food prices have absorbed a major jolt from rising petroleum prices, but food prices should not play a major role in inflation in the months ahead.

Producer prices for finished consumer goods, less food and energy, indicate where core consumer prices are headed. These fell 0.3percent in July, after rising 0.2 percent in May and June.

The 0.3 percent decrease in core producer prices indicates inflation is beginning to moderate as the Federal Reserve Open Market Committee anticipated at its August 8 meeting.

Although prices for oil and other materials continue to rise, strong productivity growth is permitting manufacturers to absorb higher material costs. Third quarter productivity figures are likely to reveal a robust recovery from a lackluster second quarter performance.

The crisis in Lebanon and Israel caused unwarranted panic in oil and stock markets. Spot prices for oil averaged about $70 a barrel in June and rose to about $76 by the end of the crisis. That would have been enough to add about 15 cents to the price of a gallon of gasoline and no more than a one-time, 0.3 percent bump to the Consumer Price Index.

Since early June, gasoline prices have risen about 15 cents a gallon. Considering that gasoline prices were up 73 cents in June from a year earlier, this 15 cent movement is a major factor slowing economic growth.

With the cease fire in Lebanon, oil and gasoline prices should recede but pipeline problems in Alaska hang over the oil market. Overall gasoline prices should stabilize or fall a bit. The flagging housing market poses the most important threat to economic growth.

Tomorrows consumer price data, which covers a broader range of goods and services than the producer price index, and new housing starts for July will further illuminate Federal Reserve options.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.