South-Westerns' Economic News Summaries
Wholesale Prices Cause Inflation Concerns
Topic Employment, Unemployment and Inflation
Key Words

Of Course, This Number Doesn't Include That Extra Dollar Per Gallon at the Pump

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Reference ID: A143506632
News Story

The "core" wholesale price index excludes prices for food and energy prices because the volatility of their prices distorts what is happening to the price level overall over time. Food and oil prices rise and fall rather rapidly-partly because of speculation on commodity markets, and partly because those who need large supplies of such commodities may over-react to negative news. Such wild price swings leave any sort of sensible statistical price indexes at their mercy. The Federal Reserve in particular, and increasingly, other analysts, prefer to use the core index instead of the overall index as an indication of where the economy is headed in the next few months.

Compared with February, 2005, the core index was up 1.7 percent. Compared with the Consumer Price Index--which is a more widely reported indicator of U.S. price levels-producer (or wholesale) prices do not include taxes, subsidies or distribution costs. Economists consider wholesale price increases as early indications of broader inflation to come, because higher wholesale prices start the process of retail prices being passed on to consumers.

Costs of raw materials-including energy and agricultural commodities--used in production processes have edged up 12.0 percent in February, 2006, relative to February, 2005. Overall costs for intermediate-stage goods have increased 8.2 percent over the same period. If businesses pass on those substantial increases in production costs to consumers, the economy as a whole will experience what economist call cost-push inflation. "Inflation doesn't just happen, it bubbles up through a process," said Ken Mayland, president of Ohio-based consulting firm Clear View Economics.

Questions
1.

Discuss the difference between the wholesale price index and the consumer price index. Which do you feel lends a better forecast of future economic conditions.

2. Explain the economic concept of cost-push inflation. Do you see any relationship between various wholesale prices indexes and this kind of inflation? Explain.
Source Vikas Bajaj, "A 3rd Rise in Core Wholesale Prices Spurs Concern over Inflation", The New York Times Online,March 22, 2006.
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