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November 18th, 2008

Record PPI Drop Eases Inflation Woes

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The Producer Price Index (PPI), a measurement of costs at the production level, dropped for the third month in a row, to a record-monthly decline of 2.8% in October. The drop is largely explained by the steady decline in food and energy prices over the last few months:

Producer prices for energy products are now beginning to reflect the recent declines in energy costs. Large declines were seen in prices for petroleum products, particularly gasoline and diesel fuel.

Prices for finished food products fell by 0.2% in October but remain elevated relative to last year. However, some price relief is now occurring at earlier stages of processing. Prices for intermediate foods fell by 5.5%, while prices for crude food products fell by 11.1%. Prices for corn, feed and livestock all fell sharply.

Core PPI, which excludes the volatile cost of food and energy, rose 0.4% in October. The lack of a severe drop in pricing as seen with energy, has allowed core inflation to continue mildly through most of the year, remaining 4.4% higher in October than from a year ago. Yet, if you look at the trends for core intermediate and crude goods, prices have begun to ease over the last few months. Cheaper costs in the coming months should begin to lower the Consumer Price Index (CPI ), a measurement of cost on the consumer’s end.

What does this mean for the Fed? Fed Chairman Ben Bernanke’s inflation woes have begun to let up — the Fed is free to leave interest rates low.

What does this mean for consumers? Lower interest rates are always good news for borrowers looking for credit. Additionally, as prices decline, consumers will have more money left at the end of the month, once set aside for inflated goods like gasoline, to stimulate the economy.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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