Monday, 22 of April of 2019

Economics. Explained.  

Producer Price Index

April 11, 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 jumped 0.6% in March after  having risen 0.1% in February.  During the past year this inflation measure (the red line) has risen 2.2%.

Excluding food and energy producer final demand prices rose 0.3% in March after having risen 0.1% in February.  They have risen 2.4% in the past 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 jumped 1.0% in March after having risen 0.4% in February . These prices have now risen 1.3% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods rose 0.2% in March after having risen 0.1% in February.  During the past year the core PPI for goods (the light green line) has risen 2.1% (right scale).

Food prices rose 0.3% after having declined 0.3% in February.  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 jumped 5.6% in March after having climbed by 1.8% in February.  Energy prices have declined 0.4% in the past year.   This drop in part occurred because global demand declined sharply late last year and, at the same time, U.S. oil output was surging.  But  demand around the global now appears to be rebounding, output in Venezuela and Iran has been declining, and Saudi Arabia recently cut its oil output.  As a result, oil prices have risen to $65 per barrel but 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 March after having been unchanged in February.  This series has risen 2.4% over the course of the past year (left scale).   The jump in service goods prices late last year was 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 March after having risen 0.3% in February.  It has climbed 1.8% in the past year.

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 3.8% the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation has been countered by an increase in productivity.  Unit labor costs, labor costs adjusted for the increase in productivity, have risen 0.9% in the past year.

We expect the core CPI to increase  2.2% in 2019 after having risen 2.2% in 2018.

Stephen Slifer


Charleston, SC

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