May 11, 2023

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 0.2% in April after having fallen 0.4% in March.  In the past year the PPI has risen 2.4% which is significantly slower than the double-digit pace it was registering at this time last year. It is clearly slowing down.

Excluding the volatile food and energy categories, final demand prices rose 0.2% in April after having been unchanged in March.  Over the past 12 months this index has risen 3,2%.  It, too, is slowing down, but it is likely to be a slow gradual process and is not going to get anywhere close to the Fed’s 2.0% target rate any time soon..

We expect to see relatively high inflation as we  move forward given rapid growth in the money supply. The  problem with money growth is the cumulative effect of monthly gains which were consistently in excess of the 6.0% target from March 2020 until March of last year at which time it was $3.9 trillion above target.  M-2 began to decline in April of 2022 and currently stands $1.9 trillion above where it should be.  That represents $1.9 trillion of excess liquidity in the system which essentially guarantees that inflation will remain elevated for the foreseeable future.  If the Fed shrinks its balance sheet at its recent pace that surplus liquidity should be eliminated by the end of this year.  That is not a recipe for a significant slowing rate of inflation until that time.

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

The PPI for final demand of goods rose 0,2% in April after declining 1.0% in March   Excluding the volatile food and energy categories the PPI for goods rose 0.2% in both March and April.  This core goods sector inflation index has risen 3.3% in the past year.

Within the goods sector, food prices declined 0.5% in April after rising 0.3% in March. Typically, this is 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 2.5%. The war between Russia and Ukraine has interrupted much of the supply of wheat and corn.  Food prices should remain elevated for some time to come.

Energy prices prices rose 0.8% in April after falling 6.0% in March.   In the past year energy prices have fallen 8.0% as the impact of the war between Russia and Ukraine on energy prices has worn off.

Prices of services rose 0.3% in April after falling 0.1% in March.   In the past year prices of services have risen 3.0%.  Ex transportation and warehousing, service sector prices have 3.8%

The earlier runup in service sector prices was led by the transportation and warehousing category.  The decline in energy prices in the past six months or so has brought down the rate of inflation in this category.  It has fallen 2.3% in the past year.

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.  Also, the CPI is being inflated by the shelter component, led by rents.  Right now labor costs are climbing as firms scramble to find an adequate supply of labor and are paying higher wages, signing bonuses, and better benefits. Rents continue to rise because of the extreme shortage of available multi-family housing.

The core CPI  rose 5.7% in 2022  In 2023 we look for an increase in the core CPI of  4.7%.

Stephen Slifer


Charleston, SC