October 14, 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 August after climbing 0.3% in August and  0.6% in July.  Prices at the producer level continue to rebound following the big recession-triggered drop in the February-April period.

Excluding food and energy producer final demand rose 0.4% in both August and September after climbing 0.5% in July.  Over the past 12 months this index has risen 1.3%.  Like the overall index the “core:” PPI fell sharply in during the recession, but is not climbing back to neutral.  While we expect to see higher inflation as we  move forward in time, the increases in the past several months are probably just a rebound from the recession.  However, because we are expecting inflation to head higher, we will keep an eye on this series in the months ahead.

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

The PPI for final demand of goods rose 0.4% in September after rising 0.1% in August and 0.8% in July.  Excluding the volatile food and energy categories the PPI for goods rose 0.4% in September after climbing 0.3% in both July and August.  This core rate of inflation has risen 1.3% in the past year.

Food prices rose 1.2% in September after having fallen 0.4% in August and 0.5% 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 0.9%.

Energy prices prices declined 0.3% in September after having fallen by 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 begin to re-open oil prices have recovered most of what they lost during the recession.  In the past year energy prices have fallen 11.4%.

The PPI for final demand of services rose 0.4% in September after climbing 0.5% in both July and August.   In the past year prices of services have risen 1.2%.

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 1.3% in 2020 versus a 2.3% increase in 2019  The core CPI increased 2.2% in 2019.  We expect it to increase 2.0% 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 2.7% and an increase in the core CPI of 2.4%.

Stephen Slifer

NumberNomics

Charleston, SC