Monday, 24 of June of 2019

Economics. Explained.  

Producer Price Index

June 11, 2019

The Producer Price Index for final demand – intermediate demand  includes producer prices for goods, as well as prices for construction, services, government purchases, and exports and covers over 75% of domestic production.

Producer prices for final demand rose 0.1% in May after having risen 0.2% in April.  During the past year this inflation measure (the red line) has risen 1.9%.

Excluding food and energy producer final demand prices rose 0.2% in May after having climbed 0.1% in April.  They have risen 2.3% in the past year (the pink line).  This series was steadily accelerating for a couple of years, but it has begun to drift lower in the past 12 months or so.

This overall index can be split apart between goods prices and prices for services.

The PPI for final demand of goods fell 0.2% in May after having increased 0.3% in April. These prices have now risen 0.6% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods was unchanged in both April and May.  During the past year the core PPI for goods (the light green line) has risen 1.6% (right scale).

Food prices fell 0.3% in May after having declined 0.2% in April.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have risen 0.4%.

Energy prices declined 1.0% in May after having risen 1.8% in April and 5.6% in March.  Energy prices have fallen 3.0% in the past year.   Output in Venezuela and Iran has been falling steadily and Saudi Arabia recently cut its oil output in an effort to boost prices, but U.S. production has continued to surge to a new record high level of 12.4 million barrels per day and that increase in output has more than countered the OPEC shortfall.  As a result, oil prices have now declined to about $53 per barrel.

The PPI for final demand of services rose 0.3% in May after having climbed 0.1% in April.  This series has risen 2.4% over the course of the past year (left scale).   The PPI for final demand of services excluding trade and transportation (the light blue line)  jumped 0.5% in May after having increased 0.3% in April.  It has climbed 2.4% in the past year.

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.6% the labor market is well beyond full employment.  As a result, wages pressures have begun to climb, but the resulting upward pressure on inflation has been countered by an increase in productivity.  Unit labor costs, labor costs adjusted for the increase in productivity, have fallen 0.8% in the past year.  Compensation climbed 1.5% during that period of time but that increase was almost entirely offset by a 2.4% increase in productivity.  No wonder the seemingly tight labor market is not putting upward pressure on inflation — the increase is being entirely offset by an increase in productivity.  That means that firms have no real incentive to raise prices — workers have earned their fatter paychecks.

We expect the core CPI to increase  2.3% in 2019 after having risen 2.2% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



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