Long Term Perspective

After removing volatile food and energy prices, the PPI rose more slowly than the CPI on a year-over-year basis until late 2004 – early 2005. This is a rare occurrence. Usually, the CPI posts larger year-over-year gains because it consists of services, where prices are stickier and take a longer time to change. The PPI consists of goods only, where competitive pressures are stronger and price changes are more flexible. The normal pattern resumed in late 2005 and through 2007 as a slowing economy has had more impact on the PPI than on the CPI which is still stubbornly high.

Short Term Perspective

Even excluding the volatile components, the PPI has been on a roller coaster the past year. The core PPI softened in mid-2006, firmed early in 2007, and softened in the second quarter of 2007 on a year-on-year basis and then rebounded in late 2007. The core CPI had shown signs of moderating during the first half of 2007 but turned back up late in the year. The CPI is above the top of the Fed’s comfort zone. The core PPI on a year-on-year basis stood at 1.9 percent in November while that for the core CPI was 2.3 percent.