April 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 1.0% in March after rising 0.5% in February after having jumped 1.3% in January.  The March increase was widespread with prices for non-energy goods and services climbing as well as food prices and energy prices.  The January increase was the largest advance since the index began in December 2009.  Prices at the producer level rebounded in the fall following the big recession-triggered drop in the February-April period,   In the past twelve months the PPI has risen 4.3%.

Excluding food and energy prices final demand rose 0.7% in March after rising 0.2% in February after having jumped by 1.2% in January (see chart above).  Over the past 12 months this index has risen 3.1%.

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 jumped 1.7% in March and 1.4% in both January and February.  Excluding the volatile food and energy categories the PPI for goods rose 0.9% in March, 0.3% in February and 0.8% in January.  This core goods sector inflation index has risen 3.0% in the past year.

Within the goods sector, food prices rose 0.5% in March after having jumped 1.3% and 0.2% in January.  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 5.0%.

Energy prices prices surged 5.9% in March, 6.0% in February, 5.1% in January and 4.9% in December.  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 more than recovered all of what they lost during the recession.  In the past year energy prices have risen 24,5%.

Prices of services rose 0.7% in March after rising 0.1% in February after having climbed 1.3% in January.   In the past year prices of services have risen 3.0%.

.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, 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 2.3%.  In 2022 we look for an increase in the core CPI of 3.0%.

Stephen Slifer

NumberNomics

Charleston, SC