November 9, 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 0.6% in October after climbing 0.5% in September. The  October increase was relatively widespread but energy prices jumped more than most other categories.  The January 2021  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 8.7%, but in the past six months the pace has accelerated slightly to 9.5%. There is no hint as yet these prices are beginning to decline and, therefore, no hint that the run-up in inflation beginning to slow.

Excluding food and energy prices final demand prices climbed 0.4% in October after rising 0.2% in September.   Over the past 12 months this index has risen 6.8% but In the past six months it has quickened to an 8.0% pace.

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 12.8% pace is double its average growth during the past decade or so of 6.0%  Money growth will slow between now and the middle of next year as the Fed phases out its monthly securities purchases.  Nevertheless, money growth will remain excessive throughout 2022 — which means that the inflation rate is bound to remain elevated..

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 October after rising 1.3% in September  Excluding the volatile food and energy categories the PPI for goods rose 0.5% in October after rising 0.6% in both August and September.  This core goods sector inflation index has risen 8.6% in the past year, 9.6% in the past six months..

Within the goods sector, food prices fell 0.1% in October after increasing 2.0% in September.  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 10.8%.  In this case the “exceptional drought” in the West (39% of California falls into that category) is damaging crops and pushing food prices higher.  This is not going to end any time soon.

Energy prices prices surged upwards by 4.8% in October after jumping 2.8% in September.  Energy prices plunged during the recession as the global economy stopped dead in its tracks.  However, as the U.S. and global economies are re-opening 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.  Russia is holding Europe hostage by not shipping additional gas to Europe until the Nordstream2 pipeline is finished.  In the past year energy prices have risen 41.8%.

Prices of services rose 0.2% in both September and October.   In the past year prices of services have risen 6.2%.  In the past six months they have accelerated to a 7.1% pace.

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 4.8%.  In 2022 we look for an increase in the core CPI of 3.7%.

Stephen Slifer

NumberNomics

Charleston, SC