November 15, 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 declined 0.5% in October after having risen 0.4% in September after having jumped 0.8% in August.  The drop in the PPI in October was almost exclusively caused by a huge drop in gasoline prices. In the past year the PPI has risen 1.3% which is significantly slower than the double-digit pace it was registering in the middle of last year. It  has clearly slowed down.

Excluding the volatile food and energy categories, final demand prices were unchanged in October after having risen 0.2% in September.  Over the past 12 months this index has risen 2.5%.  It too has slowed.

We thought that we would continue to see relatively high inflation in the months ahead because there still seems to be surplus liquidity in the economy. The cumulative effect of monthly gains consistently in excess of the 6.0% M-2 target from March 2020 until March of last year pushed M-2 almost $4.0 trillion above target.  M-2 began to decline in April of 2022 and is still $1.3 trillion above where it should be.  It appears that the removal of $2.7 trillion of surplus liquidity is already helping to bring inflation back down toward the Fed’s target.  That is sooner than we anticipated, but if that surplus liquidity continues to shrink we should look for all measures of inflation — including the CPI and the PCE core rate of inflation — to move closer and closer to the Fed’s target.

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

The PPI for final demand of goods declined 1.4% in October after having risen 0.8% in September after jumping 1.9% in August   About 80% of the drop in goods prices in October was caused by a sharp drop in gasoline prices.  Excluding the volatile food and energy categories the PPI for goods rose 0.1% in October and 0.2% in September.  This core goods sector inflation index has risen 2.0% in the past year.

Within the goods sector, food prices fell 0.2% in October after having risen 0.7% in September. 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 declined 2.3%.

Energy prices plunged 6.5% in October after having risen 3.1% in September and having surged 10.2% in August. In the past year energy prices have declined 9.3%.  This drop reflects the return to a more normal level for energy prices following the dramatic runup that occured at the beginning of the Ukraine/Russia war.   We expect crude prices to remain in a range from $80-90 per barrel.

Prices of services were unchanged in October after having risen 0.2% in September..   In the past year prices of services have risen 2.6%.  Ex transportation and warehousing, service sector prices have climbed 4.3%.

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 housing.

The core CPI  is expected to increase 3.9% this year and 3.1% in 2024.  It is not expected to return to the Fed’s 2.0% target pace until 2025.

Stephen Slifer


Charleston, SC