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Yesterday’s RealityChek post showed that the baseline effect was no longer a prime driving force behind the historically high consumer inflation rates with which Americans have struggled. That is, the new Labor Department data for the Consumer Price Index (CPI) revealed that unlike its monthly predecessors, the March annual inflation rate wasn’t so strong largely because prices were catching up from having risen so weakly the year before. Instead, because March, 2020-21 CPI was already getting pretty warm – because the U.S. economy had continued recovering (unevenly) from the deep spring, 2020 downturn – the March, 2021-22 inflation result made clear that worrisome price increases had acquired a momentum of their own.

This morning came both another sign that the baseline excuse for high inflation has run its course, and that rapid price increases could well continue for many more months – the Labor Department’s March inflation report for wholesale prices. As opposed to the CPI, which measures what business charge consumers, the so-called Producer Price Index (PPI) gauges what businesses themselves pay for the goods and services they need in order to turn out whatever they sell to individuals and households.

And because the new PPI makes clear that the baseline excuse can no longer be used for such wholesale inflation either, it augurs more torrid consumer price hikes, too – since businesses naturally try to pass on their higher costs to their final customers, and often succeed. Moreover, if you look at the annual inflation increases for recent months, you see that the baseline effect for the PPI ended in February.

The table below presents in the left column the annual PPI increases for each month from January, 2021 through this March, and in the right column, the same numbers for the previous year 2019-2020. As with the Consumer Price Index, the baseline year for the 2021-22 results is 2020-21.

Jan 2021:         1.60 percent            1.97 percent

Feb 2021:        2.96 percent            1.11 percent

March 2021:   4.15 percent            0.34 percent

April 2021:     6.51 percent           -1.52 percent

May 2021:      6.99 percent           -1.10 percent

June 2021:      7.56 percent            -0.68 percent

July 2021:       7.96 percent            -0.25 percent

Aug 2021:       8.65 percent            -0.25 percent

Sept 2021:       8.78 percent             0.34 percent

Oct 2021:        8.87 percent             0.59 percent

Nov 2021:       9.88 percent             0.85 percent

Dec 2021:       9.99 percent             0.84 percent

Jan 2022:      10.08 percent             1.60 percent

Feb 2022:     10.27 percent             2.96 percent

March 2022: 11.18 percent             4.15 percent

As the table indicates, the baseline effect for producer prices began earlier than that for consumer prices, was more dramatic, and lasted longer. Between January and August, 2020, such inflation plummeted from 1.97 percent to -0.25 percent. And yes, you read that last number right. Inflation became outright deflation, and producer prices actually fell on year for five straight months. The last time anything close to this happened was “never” (though, to be fair, the data for this measure of PPI, which is called final demand for both goods and servies, only go back to 2009).

So this dramatic descent into deflation deserves much of the blame for the surge in annual wholesale price inflation between January and August, 2021 – from 1.60 percent to 8.95 percent.

Moreover, 2019-20 annual PPI increases stayed below one percent through December. In January, 2021, the annual rate nearly doubled, to 1.60 percent – signaling that the baseline effect was ending. And its final (for now) demise came the following month, when it jumped to 2.96 percent. Yet during February, 2022, yearly wholesale inflation soared past ten percent. So these price increases obviously entailed much more than a return to normal from unusually low 2020-21 inflation (including those falling prices for nearly half the year). And the more so for this March, since its baseline comparison figure was a whopping 4.15 percent.

These PPI trends and the prolonged high consumer inflation they portend only sharpen the dilemma faced by the Federal Reserve – the only part of the federal government able to act relatively quickly to bring price increases under control. If it tightens monetary policy too dramatically, it could slow economic growth equally dramatically and even bring on a recession. If the central bank is too hesitant, it could still slow growth but leave inflation unacceptably high – a condition called “stagflation.” 

That is, there’s a real prospect that the economy could enter a state it last experienced during the era of disco, streaking, and shag haircuts. But as those of us who lived through it know, economically speaking, this “Seventies Show” was no comedy.