Monday, 11 of December of 2017

Economics. Explained.  

Producer Price Index

November 14, 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 both September and October.  During the past year this inflation measure has risen 3.1%.  It had been bouncing around in a range from 2.0-2.5% for the some time but has broken out of that range to the upside.

Excluding food and energy producer final demand prices jumped 0.4% in both September and October.  They have risen 2.7% since October of last year.  This is the largest year-over-year increase since November 2011 .  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 rose 0.3% in October after  having jumped 0.7% in September and 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 both September and October.  During the past year the core PPI for goods has risen 2.3% (right scale), but in the  past three  months the rate of increase has climbed further to 2.8%

Food prices rose 0.5% in October after having been unchanged in September.  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 2.9%.

Energy prices were unchanged in October after having jumped 3.4% in September after having risen 3.3% in August.  Energy prices have risen 7.9% 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 0.5% in October after having risen 0.4% in September and 0.1% in August.  This series has risen 3.0% over the course of the past year (left scale).  This is the biggest 12-month increase since the BLS began collecting producer prices for services in November 2009.  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, September, and October.  It has climbed 2.1% during the past year.  The 2.2% year-over-year increase for June was the largest 12-month increase in the history of this series which dates back to November 2009.

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.

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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