Long Term Perspective

The PPI for finished goods expanded more rapidly than the CPI on a year-over-year basis in 2005, reflecting higher price increases that were not totally passed on to consumers. This trend continued into 2006 until in the third quarter when the PPI slowed more than the CPI. This greater weakness in the PPI than the CPI continued into the first quarter 0f 2007 with lower oil prices pulling down the overall PPI growth rate.  Strong services inflation has kept the CPI up while the slowing economy has had more impact on the PPI which does not have services. A surge in oil prices during the second half of 2007 boosted CPI and PPI inflation back up with PPI inflation back above that for the CPI.

Short Term Perspective

Both the PPI and the CPI inflation have risen over the last couple of months due to higher oil prices with food prices also contributing. Because of headline inflation rising so much, the Fed has been shifting focus from being so much on core inflation, commenting that in the long-term, headline inflation must come down to acceptable levels. This means the Fed is worried about energy inflation fueling overall inflation. For November, on a year-on-year basis, the overall PPI stood at 7.7 percent while that for the CPI was 4.3 percent.