January 18, 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 fell 0.5% in December after having risen 0.2% in November.  In the past  twelve months the PPI has risen 6.2%.

Excluding food and energy prices, however,  final demand prices rose 0.15 after climbing 0.2% in November.  Over the past 12 months this index has risen 5.5%.  The recent data provide some clear evidence that these prices have begun to slow. 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 very growth in the money supply. The  problem with money growth is the cumulative effect of monthly gains which have consistently been in excess of the 6.0% target since March 2020.  As a result, M-2 currently stands $3.6 trillion above where it should be.  That represents $3.1 trillion of excess liquidity in the system which essentially guarantees that inflation will remain elevated for the foreseeable future.  Even if the Fed shrinks its balance sheet at the pace it has indicated, there will still be surplus liquidity at the end of this year.  That is not a recipe for a significant slowing rate of inflation

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

The PPI for final demand of goods fell 1.6% in December after having risen 0.1% in November..  Excluding the volatile food and energy categories the PPI for goods rose 0.2% in December after rising 0.3% in November.  This core goods sector inflation index has risen 6.0% in the past year.

Within the goods sector, food prices declined 1.2% in December after having jumped 3.3% in November. Typically, this is a volatile series.  It increases sharply for a few months and then drops back a few months later.  However, in the past year food prices have risen 14.2%.  It is likely that drought and fires in the West pushed prices higher, and now the significant flooding could do the same.  And the war between Russia and Ukraine has interrupted much of the supply of wheat and corn.   This is not going to end any time soon.

Energy prices prices fell 7.9% in December after having declined 3.2% in November.  The war between Russia and Ukraine continues to threaten the supply of natural gas and oil to Europe.  At the same time the Biden administration is doing everything in its power to curtail the production of fossil fuels in the U.S..  In the past year energy prices have risen 8.6%.  They are going to remain elevated for some time to come.

Prices of services rose 0.1% in December after rising 0.2% in November.   In the past year prices of services have risen 5.0%.

The runup in service sector prices is being driven by the transportation and warehousing category which has risen 10.3%.  Within transportation the largest gains have come from deep water shipping (30.0%) and truck shipping (8.2%) as rising diesel prices are boosting the cost of shipping goods via truck.

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.  And 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.

The core CPI  rose 5.7% in 2022  In 2023 we look for an increase in the core CPI of  4.2%.

Stephen Slifer


Charleston, SC