TUESDAY NOVEMBER 17, 2009

Headline vs. Pipeline Inflation

The Producer Price Index (PPI) was released this morning and was a tame +.3%.  The wholesale inflation numbers continue to be well behaved and will give the Fed plenty of room to keep interest rates low "for the foreseeable future."

However, there is a bit of caution in the new numbers.  Most of us only pay attention to the headline inflation numbers which are for finished goods.  The inflation numbers are actually broken down into three categories:  Raw, Intermediate and Finished.  By watching the raw and intermediate categories, one can view a "pipeline" for future inflation.  While the finished or headline number posted a benign +.3%, the intermediate and raw numbers were up 3% and 5.4% respectively.

As consumers, we see the prices of the end product, say an appliance like a refrigerator.  If copper prices are rising,  the cost of producing electrical wire will increase.  If wire prices increase, the cost of manufacturing a refrigerator will increase.  If the cost of making a refrigerator increase, the consumer will eventually pay more.

I continue to doubt that inflation is a near-term risk.  Nonetheless, the "pipeline" of inflation bears watching.

POSTED AT 1899-12-30 08:56:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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