WASHINGTON — The monthly change in producer price index was a 0.1% dip in December, but this latest monthly wiggle masks the far more important fact that key prices rose substantially in 2007 even outside of energy.

December core PPI was up 0.2%, and the overall PPI posted a 6.3% gain over the year and core posted a 2.0% rise over the year. PPI had its largest gain since a 7.1% increase in 1981, a year of stagflation, illustrating the risks from rising input costs.

December’s energy sector PPI was down 1.9% after a 14.1% rise in November. Energy’s only component gain was residential electric at plus-0.6%.

Food was up 1.3%, reflecting jumps in fruit, vegetables, cooking oils, and meats, after posting flat in November.

In core, the wide range of gains is worrisome. Unrounded core PPI was up 0.184%, still larger than expected.

Passenger cars were down 0.9% in a reversal after a 0.6% rise in November and a 1.0% increase in October. That suggests that higher new auto prices are not sticking, and helped hold down the core gain.

Intermediate PPI was down 0.2%, and crude rose 1.0% as foodstuffs jumped.

A bottom line is that the December readings are favorable but there is still inflation risk in train. The Federal Reserve is not focused on inflation currently, but it is bad for bonds and suggestive of a squeeze on corporate profit margins.

— Market News International

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