March 13, 2025

The Producer Price Index for final 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 was unchanged in February after rising 0.6% in January and 0.5% in December.  In the past year the PPI has risen 3.2%.  It seems have been relatively stable in recent months.

Excluding the volatile food and energy categories, final demand prices declined 0.1% in February after rising 0.5% in January and 0.4% in December  Over the past 12 months this index has risen 3.4%.

We have seen  relatively high inflation because of surplus liquidity in the economy. The cumulative effect of monthly gains in the money supply consistently in excess of the 6.0% M-2 target from March 2020 until March 2022 pushed M-2 almost $4.0 trillion above target.  M-2 began to decline in April of 2022 but is still $0.5 trillion above where it should be.  It appears that the removal of $3.5 trillion of surplus liquidity is helping to bring inflation back down toward the Fed’s target.  If that surplus liquidity continues to shrink we should look for all measures of inflation — including the CPI and the PCE core rate of inflation — to move closer and closer to the Fed’s target.

The overall PPI index can be split apart between goods prices and prices for services.

The PPI for final demand of goods rose 0.3% in February after climbing 0.6% in January after increasing 0.5% in December.  Excluding the volatile food and energy categories the PPI for goods rose 0.4% in February after having risen 0.,2% in January and 0.1% in December.  This core goods sector inflation index has risen 2.1% in the past year.

Within the goods sector, food prices jumped 1.7% in February after climbing 1.0% in January after having gained 0.3% in December. this category includes a breathtaking 53.6% increase in chicken eggs in February caused by the avian flu.  Egg prices have risen 183% in the past year. This is a volatile series.  It increases sharply for a few months and then drops back a few months later.  In the past year food prices have risen 5.9%.

Energy prices declined 1.2% in February after rising 1.8% in January after climbing 2.1% in December.  It, too, is a volatile series.  In the past year energy prices have declined 3.8%.

Prices of services declined 0.2% in February after rising 0.6%% in January after having climbed 0.5% in December.  In the past year prices of services have risen 3.9%.  Ex transportation and warehousing, service sector prices have climbed 4.0%.  The increase in this core services group in the past year is fairly widespread —  portfolio management, property and casualty insurance, travel accommodations services, recreational activity services, dental care, and legal services.

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.  Those labor costs are better captured in the CPI.  Also, the CPI is being inflated by the shelter component, led by rents but also automobile insurance and car repairs..

The core CPI  is expected to increase 3.1% in 2025 which suggests an increase in the core personal consumption expenditures deflator of about 2.6% in 2025.

Stephen Slifer

NumberNomics

Charleston, SC