Producer prices drop for the second year in a row
By DARYL DELANO -- Industrial Distribution, 3/1/1999
Inflation did not raise its ugly head in 1998 -- to the dismay of few, but to the surprise of many. It wasn't a good year if you were a commodity producer, as weakened global demand and production overcapacity kept prices in check or pushed them lower.This translated into very good news for consumers of commodities, however, as both individual consumers and businesses often found themselves paying less for product. For construction businesses, labor is increasingly hard to find and is costing more, but materials and components used in the business are generally plentiful and affordable.
Overall producer prices for finished goods declined again in 1998, despite an unusual surge at the end of the year. The Labor Department's Producer Price Index (PPI) for all finished goods was 0.1% lower at the end of 1998 than it was during the final month of 1997. Between December 1996 and December 1997, the PPI had fallen by 1.2%.
The PPI increased 0.4% between November and December, by far the largest monthly increase of the year. At first blush, an increase of this magnitude would seem to be cause for serious concern about inflation reawakening after a long period of hibernation. However, there's much less here than meets the eye.
All of the net increase in December's PPI could be attributed to a 30.7% surge in cigarette prices -- a byproduct of the recent settlement between the government and tobacco companies. Excluding the rise in cigarette prices, the core PPI actually declined by 0.1% over the month.
Consequently, there's no reason to believe that significant degree of inflation will re-emerge anytime soon. Global commodity markets continue to be awash in overcapacity, and demand isn't likely to grow fast enough to absorb all of the steel, paper, lumber, semiconductors, and variety of other products that manufacturers around the world can churn out ever-more-efficiently.
According to the producer price survey detail, plumbing fixture and brass fittings product prices were, on average, little changed between 1997 and 1998. During December 1998, the price index for plumbing products was only 0.1% above its level of 12 months earlier. The accompanying table provides a summary of recent price trends for a variety of other products of significance to the construction industry.
We're expecting to see inflation accelerate only a bit during 1999, as the result of continued low commodity metal prices and only a slight increase in overall market demand.
The PPI survey showed that in 1998 the composite price index covering intermediate materials and components used by the construction industry rose by a scant 0.1%, while prices for crude construction materials dropped by an average of 4.8%.
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