Sunday, 18 of February of 2018

Economics. Explained.  

Producer Price Index

February 15, 2018

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 January but that follows no change in December.  During the past year this inflation measure has risen 2.6%.  It had been bouncing around in a range from 2.0-2.5% for the some time but has now begun to rise somewhat more rapidly.

Excluding food and energy producer final demand prices also rose 0.4% in January after having declined 0.1% in December.  They have risen 2.3% since January of last year.  This series has been quietly accelerating for the past two years.  Inflationary pressures are gradually 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 January after having risen 0.1% in December. These prices have now risen 3.4% in the past year (left scale).  Excluding the volatile food and energy categories the PPI for goods rose 0.2% in both December and January.  During the past year the core PPI for goods has risen 2.1% (right scale).  It has been rising at about that pace for the past year .

Food prices fell 0.2% in January after having declined 0.4% in December.  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 1.7%.

Energy prices jumped 3.4% in January after having risen 0.5% in December and 3.6% in November.  Energy prices have risen 9.6% 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.  However, U.S. oil output is now surging and crude prices have fallen from about $69 per barrel  to about $60 in the past couple of weeks which will trigger a significant drop in this component in February.

The PPI for final demand of services rose 0.3% in January after having declined 0.1% in December.  This series has risen 2.2% over the course of the past year (left scale).   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 0.3% in January after having declined 0.1% in December .  It has climbed 2.2% during the past year.  This series, like the overall index, has been gradually accelerating for some time.

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 the prices 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 4.1%, 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 but some of the upward pressure on inflation should be countered by an increase in productivity,.

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 2.4% in 2018 after having risen 1.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC



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