Feeds: 
symbol identifies content for paid subscribers only.
Surprising Inflation in the PPI is not Surprising
The markets are supposed to be surprised by the high rates of inflation shown in the producer price indexes this morning. The overall finished goods index rose by 3.2 percent, driven by a 14.1 percent jump in energy prices. The core index rose by 0.4 percent, the largest increase since February. The core intermediate goods index rose by 1.0 percent, suggesting more inflationary pressure down the road.
These increases are not a surprise to folks who paid attention to the import/export price data reported yesterday. There were big jumps reported for both the price of non-oil imports and non-agricultural exports, as noted here. A falling dollar does affect the rate of inflation, but it can take time.
--Dean Baker
COMMENTS (4)
I see The Fed has a new fund.
My theory is that it is a " bank-run insurance policy". Should a bank go to the discount window it would be known, but this new fund keeps identities secret so that large depositors don't see the withdrawals and start a bank run. The Fed does not meet until the end of January, so this will tide the banks over but not give away their identities.
thoughts?
Posted by: Michael McKinlay | December 13, 2007 1:24 PM
Michael,
From what I've read (and it hasn't been much on the issue) when the Fed cut the discount "penalty" to 1/2 a % last August, it was much ballyhooed, (just like the current plan) but then almost no activity of substance, in spite of the supposed credit "crisis or crunch". I think we will see a similar underwhelming reaction to this new "innovation" in terms of actual usage.
I suspect the reason is not embarrassment or worry about large depositors, "finding out". The large depositors already know, in most cases, which (large) financial institutions are having trouble (almost all of them).
I think the reason is that there is no real credit crisis, rather the industry is using this mirage (similar to the Social Security "crisis") to get something; probably lower borrowing costs, to mitigate some of the profit loss from the dead mortgage industry. Maybe not.
But my real point here, is that we constantly read about the "crunch" and the "crisis", but I have yet to see an explanation of what that credit crisis is.
The mortgage industry? No. What prudent lender will provide 500k for a house he knows is overvalued by 30%. Wait till the price comes down, then I'll loan you the money.
Because some of the big banks have so squandered their capital that they do not have capacity. Big deal, let one of the prudent banks handle the transaction. (Or maybe Chavez will loan us some money if we're nicer to him).
In other words, where's the credit beef? I honestly don't know.
Posted by: Joe K | December 13, 2007 6:40 PM
Joe K - The banking system is all about leverage. The assets that are going bad were leveraged from 10 to 1 to 15 to 1.
For every dollar wiped out the bank has to sell $10 - $15 to regain solvency. This has a knock on effect through the system of 90 to 1 with the pass through of this leverage. So it doesn't take much to push this pyramid over. That is why deposits are so important.
Hence a private "BankRun Insurance" pool, since the discount window is public everyone would know which bank is using emergency lending and withdraw their deposits, crashing the bank.
Posted by: Michael McKinlay | December 13, 2007 7:07 PM
CitiBank, Chase and Bank of America seem to be playing three card monty with the public.
Last spring it seemed that the banks that are too big to fail have failed. Now we pretend that they have not.
Since the government is now bailing out banks, what benefit will the citizens of that government get for their money?
Posted by: Dr. Zimmerman Robert | December 15, 2007 6:07 PM