June 11, 2020
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 rose 0.4% in May after having fallen 1.3% in April and 0.2% in March. The May increase was attributable to the volatile food category (which rose 6.0%, and energy prices which climbed 4.5%. .
Excluding food and energy producer final demand fell 0.1% in May after having fallen 0.4% in April..
This overall index can be split apart between goods prices and prices for services.
The PPI for final demand of goods rebounded by 1.6% in May have having dropped by 3.3% in April. Excluding the volatile food and energy categories the PPI for goods was unchanged in May after having declined 0.4% in April. In the past year this category has risen 0.2%,
Food prices jumped 6.0% in May after having declined 0.5% in April. The increase was led by beef and veal prices which jumped 69.1%, pork climbed 15.0% and chickens gained 14.4%.
Energy prices prices 4.5% in May nave having plunged 19.0% in April, 6.7% in March, and 3.6% in February. 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 has stopped dead in its tracks and, along with the drop in global demand, the demand for oil products has plunged. However, prices began to climb in May as the U.S. and global economies begin to re-open.
The PPI for final demand of services fell 0.2% in both April and May after having risen 0.2% in March.
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 it to rise just 0.9% in 2020 versus a 2.3% increase in 2019 The core CPI increased 2.2% in 2019. We expect it to increase 1.0% 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 CPI of 3.1% next year and an increase in the core CPI of 2.3%.