July 14, 2021

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 1.0% in June after rising 0.8% in May and 0.6% in April.  The  June increase was widespread with prices for non-energy goods climbing as well as food and energy prices.  The January increase of 1.3% was the largest advance since the index began in December 2009 and producer prices have been rising steadily since.  In the past twelve months the PPI has risen 7.1%, but in the past six months the pace has accelerated to 10.5%.

Excluding food and energy prices final demand rose 0.2% in June after climbing 0.7% in March, April, and May.   Over the past 12 months this index has risen 4.6%.  but In the past six months it has quickened to an 8.7% pace.

We expect to see higher inflation as we  move forward in time given the very rapid rate of growth in the money supply.

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

The PPI for final demand of goods rose 1.2% in June after climbing 1.5% in May, and 0.6% in April.  Excluding the volatile food and energy categories the PPI for goods rose 1.0% in June, 1.1% in May, 1.0% in April..  This core goods sector inflation index has risen 6.9% in the past year, 10.2% in the past six months..

Within the goods sector, food prices jumped 0.8% in June after rising 0.5% in May and 2.1% in April..  This is always 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 10.6%.

Energy prices prices rose 2.1% in June and 2.2% in May after having declined 2.4% in April.  Energy prices plunged during the recession as the global economy stopped dead in its tracks.  However, as the U.S. and global economies have begun to re-open oil prices have more than recovered all of what they lost during the recession.  In the past year energy prices have risen 34.9%.

Prices of services rose 0.8% in June and 0.6% in both April and May..   In the past year prices of services have risen 5.2%.

.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.

The core CPI increased 1.6% in 2020.  However, for 2021 aa the economy gets back to a more normal pace, we should see a relatively rapid increase in the core CPI of 5.3%.  In 2022 we look for an increase in the core CPI of 3.7%.

Stephen Slifer

NumberNomics

Charleston, SC