Friday, 14 of December of 2018

Economics. Explained.  

Producer Price Index

December 11, 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 0.1% in November after having jumped 0.6% in October.  During the past year this inflation measure (the red line) has risen 2.5%.

Excluding food and energy producer final demand prices rose 0.3% in November after having climbed by 0.5% in October.  They have risen 2.6% since October 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 0.4% in November after having jumped 0.6% in October. These prices have now risen 2.2% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.3% in November after having been unchanged in October.  During the past year the core PPI for goods (the light green line) has risen 2.5% (right scale).

Food prices jumped 1.3% in November after having climbed by 1.0% in October.  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 0.1%.

Energy prices plunged by 5.0% in November after having jumped 2.7% in October.  Energy prices have risen 3.2% in the past year.   This recent drop is in large part because U.S. oil output is now surging and OPEC  increased its crude oil output.  But now OPEC countries appear to have cobbled together an agreement to cut oil production in the months ahead.

The PPI for final demand of services rose 0.3% in November after having jumped 0.7% in October.  This series has risen 2.6% 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 November after having increased 0.2% in October.  It has climbed 2.5% during the past year.  This series, like the overall index, has leveled off in the past year or so.

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 November this series has actually declined to 60.7  This means that prices continued to climb in those months, but the rate of increase was considerably less than in other recent months.  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 3.7% 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 2.2% in 2018 and 2.3% in 2019 after having risen 1.8% in 2017.

Stephen Slifer

NumberNomics

Charleston, SC



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