December 11, 2020

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 0.1% in November after climbing 0.3% in October, 0.4% in September, 0.3% in August and  0.6% in July.  Prices at the producer level rebounded in the fall following the big recession-triggered drop in the February-April period.  But they appear to have leveled off in November.

Excluding food and energy producer final demand was unchanged in November after rising 0.1% in October, 0.4% in both August and September and 0.5% in July.  Over the past 12 months this index has risen 1.2%.  Like the overall index the “core:” PPI fell sharply during the recession, but it is now climbing back to neutral.  But 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 0.4% in November after having climbed 0.5% in October, 0.4% in September, 0.1% in August, and 0.8% in July.  Excluding the volatile food and energy categories the PPI for goods rose 0.2% in November after having been unchanged in October, risen 0.4% in September, and 0.3% in both July and August.  This core goods sector inflation index has risen 1.4% in the past year.

Within the goods sector, food prices rose 0.5% in November after having jumped 2.4% in October and 1.2% in September.  This is always a volatile series.  It increases sharply for a few months and then drops back a few months later.  But the increases in recent months seem to reflect the loss of crops in the California wildfires.  In the past year food prices have risen 1.3%.

Energy prices prices 1.2% in November after having climbed 0.8% in October, after having declined 0.3% in September and 0.1% in August.  Energy prices plunged during the recession.  For the most part the drop in energy prices is the result of extreme measures taken around the globe to halt the spread of the corona virus.  As a consequence, the global economy stopped dead in its tracks and, along with the drop in global demand, the demand for oil products has plunged.  However, as the U.S. and global economies have begun to re-open oil prices have recovered most of what they lost during the recession, but in the past year energy prices have still fallen 11.7%.

The PPI for final demand of services was unchanged in November after having risen 0.2% in October, 0.4% in September, and 0.5% in both July and August.   In the past year prices of services have risen 1.3%.

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.

Given what we know about the CPI, we expect the core CPI to increase increase 1.7% in 2020.  However, as we look ahead into 2021 and the economy gets back to a more normal pace, we should see a steady– but still moderate — increase in the core CPI of 2.7%.

Stephen Slifer

NumberNomics

Charleston, SC