November 14, 2019

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 jumped 0.4% in October after having declined  0.3% in September.  During the past year this inflation measure (the red line) has risen 1.3%.

Excluding food and energy producer final demand rose 0.3% in October after having fallen  0.3% in September.  The core PPI has risen 1.8% in the past year (the pink line in the chart above).  This series was steadily accelerating for a couple of years, but it has been steadily drifting lower in the past 12 months.

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

The PPI for final demand of goods climbed 0.7% in October after having fallen 0.4% in September. These prices have now declined 0.3% in the past year (left scale).   Excluding the volatile food and energy categories the PPI for goods was unchanged in October after  having declined 0.1% in September.  During the past year the core PPI for goods (the light green line) has risen 0.9% (right scale).

Food prices increased 1.3% in October after having risen 0.3% in September.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have risen 3.4%.

Energy prices climbed 0.4% in October after having fallen 2.5% in both August and September.  Like food prices, energy prices are volatile.  Energy prices have risen 2.1% in the past year.   Crude oil output in Venezuela and Iran has been falling steadily and Saudi Arabia  cut its oil output in an effort to boost prices, but U.S. production has continued to surge to a new record high level of 12.6 million barrels per day and that increase in output has more than countered the OPEC shortfall.

The PPI for final demand of services rose 0.3% in both September and October.  This series has risen 2.0% over the course of the past year.   The PPI for final demand of services excluding trade and transportation (the light blue line) rose 0.1% in October after having jumped 0.4% in September.  It has climbed 2.0% 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.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.6% the labor market is well beyond full employment.  As a result, wages pressures have begun to climb. Compensation has risen 4.5% in the past year while productivity has climbed by 1.4%.  As a result, unit labor costs, labor costs adjusted for the increase in productivity, have risen 3.1% in the past year.  The big increase in unit costs should soon put upward pressure on the inflation rate..

We expect the core CPI to increase  2.4% in 2019 and 2.8% in 2020.

Stephen Slifer


Charleston, SC