September 10, 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 0.7% in August after rising 1.0% in both June and July  The  August increase was widespread with prices for energy and non-energy goods climbing as well as service sector prices.  The only relief was in lumber prices which declined 7.8% in August.  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 8.3%, but in the past six months the pace has accelerated to 10.3%. There is no hint as yet these prices beginning to decline and, therefore, the run-up in inflation beginning to slow.

Excluding food and energy prices final demand 0.6% in August after climbing 1.0% in July   Over the past 12 months this index has risen 6.7% but In the past six months it has quickened to a 9.4% 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 12.0% pace is double its average growth during the past decade or so.

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

The PPI for final demand of goods rose 1.0% in August after rising 0.6% in July.  Excluding the volatile food and energy categories the PPI for goods rose 0.6% in August after climbing 1.0% in both June, and July..  This core goods sector inflation index has risen 7.9% in the past year, 11.2% in the past six months..

Within the goods sector, food prices jumped 2.9% in August after having declined 2.1% in July..  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 12.7%.

Energy prices prices rose 0.4% in August after having jumped 2.6% in July and 2.1% in June.  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.  In the past year energy prices have risen 32.1%.

Prices of services rose 0.7% in August after climbing 1.1% in July and 0.8% in June..   In the past year prices of services have risen 6.4%.  In the past six months they have accelerated to a 9.0% 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 5.1%.  In 2022 we look for an increase in the core CPI of 3.7%.

Stephen Slifer

NumberNomics

Charleston, SC