Saturday, 21 of October of 2017

Economics. Explained.  

Producer Price Index

October 12, 2017

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 0.4% in September after having risen 0.2% in August.  During the past year this inflation measure has risen 2.5%.  It has been bouncing around in a range from 2.0-2.5% for the past six months but appears to be breaking out of that range to the upside.

Excluding food and energy producer final demand prices jumped 0.4% in September after having risen 0.1% in August.  They have risen 2.2% since July of last year.  This is the largest year-over-year increase since May 2012 .  This series has been quietly accelerating for the past two years.  Inflationary pressures are re-surfacing.

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

The PPI for final demand of goods jumped 0.7% in September after having risen 0.5% in August. These prices have now risen 3.3% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.3% in September after having climbed 0.2% in August.  During the past year the core PPI for goods has risen 2.2% (right scale).  It steadily accelerated for more than a year but has leveled off in recent months.

Food prices were unchanged in September after having declined 1.3% in August.  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 1.2%.

Energy prices jumped 3.4% in September after having risen 3.3% in August.  Energy prices have risen 10.6% in the past year.  These prices are also very volatile but the recent upswing seems to reflect a significant quickening of GDP growth around the globe.  Hence, we should not expect energy prices to fall substantially any time soon.  But by the same token they should not rise too much further.  Should they do so, U.S. producers as well as oil exporting nations around the world will begin to open the spigots and thereby cap the increase.

The PPI for final demand of services rose 0.4% in September after having risen 0.1% in August.  This series has risen 2.1% over the course of the past year (left scale).  With the sole exception of May of this year the 2.1% year-over-year increase is the largest 12-month increase in this services index since January 2015.  Changes in this component largely reflect a change in margins received by wholesalers and retailers (apparel, jewelry, and footwear in particular).  The PPI for final demand of services excluding trade and transportation rose 0.1% in both August and September.  It has climbed 1.9% during the past year.  The 2.2% year-over-year increase for June was the largest 12-month increase thus far in the business cycle.

The recent increases in producer prices was foreshadowed by the results of the Institute for Supply Management’s series on prices paid by both manufacturing and non-manufacturing firms.  In the case of manufacturing firms the chart looks like this:

And for non-manufacturing firms it looks like this:

In both cases, the run-up in prices was widespread.  It was not just energy prices.  Once again, we believe this escalation in theprices that producers are having to pay reflects stronger GDP growth around the globe.

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 4.2%, the labor market is beyond full employment.  As a result, wages pressures are sure to rise, and once that happens firms are almost certain to pass that along to the consumer in the form of higher prices.

Some upward pressure on labor costs, rents, and medicare care will further increase the upward pressure on inflation.  We expect the core CPI to increase 1.9% in  2017 and 2.5% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



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