11/15/2011
By David Urani, Research Analyst

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Producer prices were down 0.3% month to month in October, according to the Producer Price Index. PPI had been up 0.8% in the previous month but this time around energy prices were down 1.4%, helping to drag the headline number lower. The consensus estimate had been looking for a 0.2% drop in the headline. Excluding food and energy costs, "core" inflation was flat month to month versus a consensus estimate of 0.1% higher.

The issue with the report though is the fact that energy prices drug it down, and it's not likely to happen again next month considering the steady rise in oil prices in the last month. Consequentially, one could presume higher prices in November but at the same time there is no evidence that overall inflation is likely to become a problem so there's no reason to be worried yet. The Fed may also leave potential stimulus on the table.

 The easing input prices were also reflected in the Empire State manufacturing index, where inflation risks have been decelerating for a while. As far as headline activity went, the Empire State index was at 0.6, indicating the first positive number after a five month string of negative readings. That result also bested the consensus, which was expecting -2.6.

Yet, at the same time the components weren't all too encouraging. The headline seemed to rise mainly on the back of an increase in shipments from 5.3 to 9.4. However, new orders dipped from positive 0.2 to -2.1. There was also a drop in the employment component from 3.4 to -3.7. So, despite a perceived increase in overall activity, a couple of key forward looking factors went south which doesn't necessarily bode well for next month.

David Urani
Wall Street Strategies