May 12, 2022

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 rose 0.5% in April after having jumped 1.6% in March and 1.1% in February.  In the past twelve months the PPI has risen 11.0%.

Excluding food and energy prices final demand prices climbed 0.4% in April after rising 1.2% in March and 0.5% in February   Over the past 12 months this index has risen 8.8%.  The recent data provide a hint that these prices are beginning to slow/  But it is likely to be a slow gradual process and is not going to get anywhere close to the Fed’s 2.0% target rate any time soon..

We expect to see higher inflation as we  move forward in time given the very rapid rate of growth in the money supply.  Its current 9.9% is far in excess of its average growth during the past decade or so of 6.0%

The biggest problem with money growth is the cumulative effect of monthly gains which have consistently been in excess of the 6.0% target.  As a result, M-2 currently stands $4.1 trillion above where it should be.  That represents $4.1 trillion of excess liquidity in the system which essentially guarantees that inflation will remain elevated for the foreseeable future.  A lot of this surplus liquidity has found its way into the stock and bond markets.  As the Fed has embarked on a course of action to reduce the availability of credit, the markets are having to adjust to a different world.

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

The PPI for final demand of goods rose 1.3%  in April after having jumped 2.4% in March and 2.2% in February.  Excluding the volatile food and energy categories the PPI for goods rose 1.0% in April after having risen1.1% in March and 0.8% in February.  This core goods sector inflation index has risen 10.0% in the past year.

Within the goods sector, food prices climbed by 1.5% in April after having jumped by 2.5% in March and 2.0% in February. Typically, this is a volatile series.  It increases sharply for a few months and then drops back a few months later.  However, in the past year food prices have risen 16.3%.  In this case severe or worse (extreme or exceptional) drought conditions in the West is damaging crops and pushing food prices higher, and now the war between Russia and Ukraine is threatening to interrupt the supply of wheat and corn.   This is not going to end any time soon.

Energy prices prices rose 1.7% in April after having surged by 6.4% in March and 7.2% in February.  Energy prices plunged during the recession as the global economy stopped dead in its tracks.  However, as the U.S. and global economies have re-opened oil prices have more than recovered all of what they lost during the recession.  At the same time wind power has diminished in Europe and it has shifted back to natural gas and coal which is pushing energy prices sharply higher in Europe.  The war between Russia and Ukraine is threatening to interrupt the supply of natural gas and oil to Europe.  At the same time the Biden administration is doing everything in its power to curtail the production of fossil fuels.  In the past year energy prices have risen 39.8%.  They, too, are not going to decline any time soon.

Prices of services were unchanged in April after having jumped 1.2% in March and 0.5% in February.   In the past year prices of services have risen 8.1%.  The runup in service sector prices is being driven by the transportation category which has risen 22.6%.  Within transportation the largest gains have come from deep water shipping (24.8%) and truck shipping (27.4% as rising diesel prices are boosting the cost of shipping goods via truck.

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.  And right now labor costs are surging as firms scramble to find an adequate supply of labor and are paying higher wages, signing bonuses, and better benefits.

The core CPI  rose 5.5% in 2021.  In 2022 we look for an increase in the core CPI of 6.4% and 5.8% in 2022..

Stephen Slifer

NumberNomics

Charleston, SC