South-Western College Publishing - Economics  
PPI Statistics Send Mixed Inflation Signals
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Core Rate, and Producer Price Index
News Story The Producer Price Index (PPI) measures what businesses charge each other for finished goods and services. During 2006, this measure rose in all but two months. In September, the Wholesale Price Index fell 1.3 percent. That figure sounds like good news on the inflation front, but it may only be masking other signs that inflation is still with us.

When the Commerce Department adjusts the Producer Price Index, omitting volatile energy and food prices, the Core Producer Price Index--an inflationary measure monitored closely by the Federal Reserve--actually rose by 0.6 percent in September, more than expected by most economists. The rise resulted mainly from higher automobile prices.

Despite the decline in the overall PPI, the increase in the core index raises a question: Has inflation begun to moderate or not. "This is a warning for economic forecasters not too get too sanguine," said SunTrust Banks' chief economist Gregory L. Miller. "Sometimes we get these indicators that remind us we're not in control."

At their last two policy meetings, the Fed has stopped a tight money policy by leaving its benchmark short-term federal funds rate at 5.25 percent. As the economy slowed, many forecasters have bee expecting the Fed to actually cut rates in the foreseeable future. The mixed signals that these latest PPI statistics give may dampen any expectations that the Fed will lower rates any time soon.

The minutes from the September 20 meeting of the Federal Open Market Committee--the group that makes monetary policy for the Fed--indicate remaining uncertainty over inflation. Members of the committee, including Fed chairman Ben S. Bernanke, have said they are still concerned about rising prices.

Questions
Discussion Questions:
1. Discuss how the Producer Price Index could fall and economists may still worry that inflation may be a problem in the near future.
2. Visit the site http://financial-dictionary.thefreedictionary.com/Federal+Open+Market+Committee+-+FOMC and identify the make up of the Federal Open Market Committee (FOMC). Also find out how many times the committee meets each year, and look under "Federal Reserve Bank" to see where the District Banks are located. Do you think that the makeup of the FOMC is appropriate and representative of economic conditions across the U.S.? Why or why not?
Multiple Choice/True False Questions:
1. The Federal Open Market Committee (FOMC) is the main policy making group for fiscal policy in the Fed.
  1. True
  2. False
2. When volatile food and energy prices are omitted from the PPI, the refined statistic is referred to as the core PPI.
  1. True
  2. False
Source Jeremy Peters, "Wholesale Prices Fall, but Some Signs of Inflation Persist", The New York Times Online, October 18, 2006.
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