Tuesday, 19 of February of 2019

Economics. Explained.  

Producer Price Index

February 14, 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 fell 0.1% in both December and January.  During the past year this inflation measure (the red line) has risen 2.0%.

Excluding food and energy producer final demand prices rose 0.3% in January after having been unchanged in December.  They have risen 2.6% since January of last year (the pink line).  This series was steadily accelerating for a couple of years, but it has leveled off 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 0.8% in January after having declined 0.5% in November and 0.2% in December. These prices have now risen 0.4% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.3% in January after having climbed 0.1% in December.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices fell 1.7% in January after having  jumped 2.6% 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 1.4%.

Energy prices fell by 3.8% in January after having plunged 4.3% in December.  Energy prices have declined 7.8% in the past year.   This recent drop is in large part because U.S. oil output is now surging and global demand has been slowing down.  But now OPEC countries appear to have cobbled together an agreement to cut oil production in the months ahead.  This should stabilize oil prices for the time being although OPEC would like them to rise to the $85-90 per barrel mark.  Not going to happen with U.S. output surging.

The PPI for final demand of services rose 0.3% in January after having been unchanged in December.  This series has risen 2.7% over the course of the past year (left scale).   The jump in service goods prices in recent months were caused by a run-up in the trade services category.  These swings largely reflect the 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 (the light blue line) was unchanged in both December and January.  It has climbed 2.0% in the past year.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by manufacturing firms.  In the case of manufacturing firms the chart looks like the one below.  Price pressure were steadily building for six consecutive months.  Specifically, the price component rose steadily from 64.8 in November of last year to 79.5 in May.  The fact that every month was above 50.0 meant that prices producers were paying increased every single month.  Given that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  However, from June through January this series has actually declined to 49.6  This means that prices are not fairly steady.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

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 4.0% the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation should be countered by an increase in productivity.  Nevertheless, the tighter labor market should exert at least moderate upward pressure on the inflation rate.

Some upward pressure on labor costs, rents, and the cost of materials will put upward pressure on inflation.  We expect the core CPI to increase  2.4% in 2019 after having risen 2.2% in 2018.

Stephen Slifer

NumberNomics

Charleston, SC



Leave a comment