Rising Producer Prices in 1999 Dominated by Energy Goods

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Surging energy prices push up the Producer Price Index for crude, intermediate, and finished goods

The Producer Price Index (PPI) for crude, intermediate, and finished goods rose in 1999; surging energy prices were the driving force behind the acceleration in each stage of process. The Producer Price Index for Finished Goods rose 2.9 percent in 1999, after showing no change in 1998, and falling 1.2 percent in 1997. The rise in 1999 was the largest annual increase since 1990's 5.7-percent advance. The turnaround in overall finished goods was primarily due to soaring energy prices, which increased 18.1 percent, following an 11.7-percent decrease during the previous 12 months. The index for finished consumer foods rose 0.8 percent in 1999, after a slight 0.1-percent increase in 1998. However, finished goods other than foods and energy--a category that includes both consumer goods and capital equipment--increased 0.9 percent in 1999, after gaining 2.5 percent a year earlier. (See table 1.)

Table 1. Annual percent changes for major categories for major categories of the Producer Price Index by stage of processing, 1990-99

Index                          1990    1991   1992    1993

Finished goods                  5.7    -0.1    1.6     0.2
  Foods                         2.6    -1.5    1.6     2.4
  Energy                       30.7    -9.6    -.3    -4.1
  Other                         3.5     3.1    2.0      .4

Intermediate materials,
 supplies, and components       4.3    -2.6    1.0     1.0
  Foods and feeds              -1.3     -.2    -.5     5.5
  Energy                       21.8   -11.6     .7    -4.2
  Other                         1.9     -.8    1.2     1.6

Crude materials for             6.0   -11.6    3.3      .1
 further processing
  Foodstuffs and feedstuffs    -4.2    -5.8    3.0     7.2
  Energy                       19.1   -16.6    2.3   -12.3
  Other                          .6    -7.6    5.7    10.7

Index                          1994    1995   1996    1997

Finished goods                  1.7     2.3    2.8    -1.2
  Foods                         1.1     1.9    3.4     -.8
  Energy                        3.5     1.1   11.7    -6.4
  Other                         1.6     2.6     .6      .0

Intermediate materials,
 supplies, and components       4.4     3.3     .7     -.8
  Foods and feeds              -4.5    10.3    2.1    -1.7
  Energy                        2.9     1.1   11.2    -7.0
  Other                         5.2     3.2    -.9      .3

Crude materials for             -.5     5.5   14.7   -11.3
 further processing
  Foodstuffs and feedstuffs    -9.4    12.9   -1.0    -4.0
  Energy                        -.1     3.7   51.2   -23.1
  Other                        17.3    -4.2   -5.5      .0

Index                          1998    1999

Finished goods                  0.0     2.9
  Foods                          .1      .8
  Energy                      -11.7    18.1
  Other                         2.5      .9

Intermediate materials,
 supplies, and components      -3.3     3.7
  Foods and feeds              -7.3    -4.2
  Energy                      -12.1    19.6
  Other                        -1.6     1.9

Crude materials for           -16.7    15.3
 further processing
  Foodstuffs and feedstuffs   -11.0     -.1
  Energy                      -23.8    36.9
  Other                       -16.0    14.0

At the earlier stages of processing, the Producer Price Index for intermediate materials, supplies, and components rose 3.7 percent, following a 3.3-percent decline in 1998. This index captures price movements for goods such as jet fuel, paint materials, shipping containers, animal feeds, and semiconductors. The overall acceleration in intermediate materials was primarily due to rising prices for intermediate energy goods, which declined in 1998. Also contributing to the acceleration were rising prices for both nondurable and durable manufacturing materials, both of which fell last year. The index for materials and components for construction rose more than in the prior year. Prices for intermediate foods and feeds decreased less than in 1998. The intermediate core index (which excludes foods and energy) increased 1.9 percent, following a 1.6-percent decline in 1998.

Similarly, prices for crude materials for further processing advanced 15.3 percent in 1999, after falling 16.7 percent in 1998. Crude goods include commodities such as wheat, slaughter cattle, crude petroleum, natural gas, scrap metals, timber, and raw cotton. Analogous to finished and intermediate goods, most of the increase in crude goods can be attributed to rising prices for energy goods, which dropped in the previous year. Prices for crude goods other than foods and energy also increased substantially from last year. The index for crude foodstuffs and feedstuffs fell less than it did in 1998.

Inflation, as measured by the Consumer Price Index (CPI), rose 2.7 percent during 1999, accelerating from the 1.6-percent increase in 1998. As with the PPI, much of the CPI's overall increase can be attributed to rising energy prices--gasoline prices paid by consumers rose 30.1 percent in 1999. However, excluding food and energy goods, consumer prices advanced only 1.9 percent, the slowest annual rate of increase in nearly 35 years.(1)

Energy goods

The PPI for finished energy goods advanced 18.1 percent, following an 11.7-percent drop in 1998. Taking a look further up the pipeline for energy goods, prices for intermediate energy goods advanced 19.6 percent in 1999, following a 12.1-percent drop in the 1998 calendar year. Also, the PPI for crude energy materials rose 36.9 percent in 1999, following a 23.8-percent drop in 1998. While most energy products accelerated during 1999, each stage of process was driven by accelerating prices for petroleum-based commodities.

Petroleum-based energy goods. Crude petroleum accounted for three-fourths of the acceleration in crude energy materials. In 1998, petroleum prices reached near-historic lows as world production increased 1.4 percent, petroleum demand from East Asia waned, and a warmer-than-normal 1997-98 winter season decreased energy demand in the United States.(2) Crude petroleum prices, however, took a new direction in 1999 due to several factors that combined to push up oil prices by 172.0 percent. First, domestic crude oil production fell from 228.1 million barrels in 1998 to 214.6 million barrels in 1999, a decline of nearly 6.0 percent. This slowdown in production can be traced to a 10.6-percent drop in Alaskan crude oil output as well as a 4.8-percent decrease from the lower 48 States.(3)

In March 1999, the Organization of Petroleum Exporting Countries (OPEC) and several non-OPEC countries announced an agreement to reduce output. As a result, crude oil imports from some nations to the United States dropped significantly. (See table 2.)

Table 2. Imports of crude oil into the United States by country of origin, 1998-99

                                     Crude oil
                                (thousand barrels)
Country of origin                                     Percent
                                                       change
                                   1998      1999
Arab OPEC

  Qatar                             504       332       -34.1
  Kuwait                        109,412    89,914       -17.8
  Saudi Arabia                  512,452   505,272        -1.2

Other OPEC

  Venezuela                     502,552   419,893       -16.4
  Nigeria                       251,315   227,471        -9.5

Non-OPEC

  Congo (Kinshasa)  6,219         6,219       900       -85.5
  Yemen                           1,628       335       -79.4
  China, People's Republic of    15,376     4,763       -69.0
  Peru                           14,908     9,227       -38.1
  Trinidad and Tobago            19,423    14,748       -24.1
  Angola                        169,580   130,168       -23.2
  Gabon                          75,543    61,247       -18.9
  Malaysia                        9,375     7,708       -17.8
  Congo (Brazzaville)            19,527    16,645       -14.8
  Guatemala                       8,311     7,632        -8.2
  Mexico                        482,252   457,655        -5.1

SOURCE: Petroleum Supply Annual, 1999, Volume I (Energy Information Administration). See text footnote 3 for Internet address.

Other worldwide events also affected domestic oil prices in the United States. During most of the 1990s, the Far East enjoyed rapid economic expansion and the commensurate expanding demand for energy. However, in 1998, Japan's economic growth rate fell 2.9 percent, real gross domestic product (GDP) in Thailand dropped 8.1 percent, and the growth rate in South Korea fell 5.8 percent.(4) Economic slumps in these and other Asian countries caused oil demand for industrial and other uses to decline. In 1999, these economies began to recover. Real GDP rebounded, and …