–Oct PPI Overall +0.4%; Core Ex-Cars/Trucks +0.2%
–No Larger Decline in PPI Core Since August 1993

By Denny Gulino

WASHINGTON (MNI) – Surprisingly moderate price increases imposed by
the automobile manufacturers for their new model vehicles gave the
Producer Price Index core rate a big negative in October but rising
commodities prices pressured the raw materials index.

The Bureau of Labor Statistics Tuesday reported the broadest PPI
measure rose 0.4%. Both headline numbers were well below expectations.

“On the core, I don’t think the forecasters expected quite the
decline, probably not expecting the cars and trucks decrease,” senior
BLS analyst Scott Sager told Market News International just prior to
public release.

“Historically, the seasonals expect prices to rise between 4
percent and 7 percent with the introduction of the new models,” he said.
In October, before seasonal adjustment, car prices actually rose 1.3%
and trucks 2.7% which seasonal adjustment turned into declines of 3.0%
and 4.3%.

The core rate’s 0.6% decline was the largest for any month since
a matching drop in July 2006. The last time there was a larger
decline was the 1.2% in August 1993.

The 12-month change in the PPI through October was 4.3%. It was
higher through May, 5.1%. This year has moderated that increase, with
the year-to-date annualized change overall decelerated to 2.6% vs. last
year’s 3.0% at the same point. The year-to-date core rate is 1.1%, vs.
0.5% through October of last year.

October PPI food prices slipped 0.1% and energy prices, primarily
gasoline, rose 3.7%.

At the beginning of the supply pipeline, there was a completely
different story, with huge price increases for commodities pressuring
raw materials prices in October.

Crude materials prices jumped 4.3%, the most since January, as
crude oil prices rose 8.7%, corn prices 22.7% and soybeans 10.9%. Price
increase were particularly large for scrap metals.

“Increases in the crude area seemed to be carrying through to
intermediate level as well,” Sager said. Overall intermediate goods
prices rose 1.2% in October. “Again a lot of it was both metals products
and products derived from crude oil, like chemicals and plastics.”

Animal feed prices, influenced by the big increase in corn and
soybeans at the raw materials stage, rose 7.1% at the intermediate
level.

But whether those pipeline pressures reach the end user remains a
big question, Sager said. “Typically price changes become less volatile
as they pass through the pipeline,” he said. “If they did reach the
finished goods level, we wouldn’t see the type of magnitude we see at
the crude level or even the intermediate level.”

Whether producers even try to pass on those input cost hikes
“depends on the state of the economy,” he said. Even companies with
pricing power will often “sacrifice profits to gain market share so
after the turnaround they can be seen as one of leaders in their area.”

The annual quality adjustment the BLS does on cars and trucks in
October “was not a terribly significant factor,” he said. The BLS
estimated that the value of quality changes for its sample of 2011 model
year passenger cars averaged $100.80 which at retail was $110.79. The
average manufacturers’ suggested list prices this time increased just
$5.97. For trucks increased quality added $423.20 at retail. The average
retail price increased $460.98.

Expectations in a Market News International survey centered on a
0.8% increase in the October PPI overall, and a 0.1% rise in the core
rate.

** Market News International Washington Bureau: 202-371-2121 **

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