The Bureau of Labor Statistics reports monthly on import and export prices. Typically the report is released one or two days before the producer price index. While import prices are not directly factored into the producer price index, most prices of domestically produced goods often move in the same direction as the imported goods in a global competitive environment. The import price index can be viewed with or without oil products (which are a major import). The chart below shows that the import price index for petroleum products (not seasonally adjusted) is strongly correlated with the finished goods producer price index for energy (not seasonally adjusted). Note that the import price index for petroleum has declined in several months - and this has not totally been reflected in the energy PPI. It suggests that we may be pleasantly surprised on Friday with a larger-than-expected drop in energy prices. In fact, most economists are predicting that energy prices will rise for the month.

The relationship between the non-oil import price index and the finished goods PPI is virtually nil. Instead, we find that the correlation between the non-oil import price index (not seasonally adjusted) and the crude materials PPI (excluding food and energy, also not seasonally adjusted) is pretty good. This index also shows that import prices fell in April. It could point to a drop in the crude PPI for April as well. The relationship between the crude, intermediate and finished goods PPI is usually pretty good, although the magnitude of change is often at odds. Crude materials will rise or fall by a larger magnitude than the finished goods index, for instance.

On the whole, inflationary pressures have not been a severe problem in this business cycle. The bulk of the gains in the past year have focused on energy. Indeed, as the driving season begins, consumers are once again worried about the spurt in gasoline pump prices. The import price index showed friendly news - which would be useful to see tomorrow on the producer price index. We've already seen negative inflation news this week in the form of rapidly rising unit labor costs. The Fed could certainly use some friendly news if they are going to have all the leeway they need to ease credit conditions in a weakening economy.

Evelina M. Tainer, Chief Economist