Tags
baseline effect, consumer price index, cost of living, CPI, Federal Reserve, inflation, monetary policy, PPI, Producer Price Index, recession, supply chains, wholesale inflation, wholesale prices, {What's Left of) Our Economy
If you follow the news about the U.S. economy, you know by now that the federal government’s Producer Price Index (PPI – its measure of wholesale price inflation), rose at a slightly slower annual rate in April (11.03 percent) than in March (11.18 percent).
Ditto for the core PPI, which omits not only food and energy but trade services – since supposedly they’re volatile for reasons having nothing to do with the economy’s fundamental vulnerability to out-of-the-ordinary price changes (decreases as well as increases).
Both PPIs measure how much businesses charge each other for the goods and services they turn into final products and sell to households and individuals. That’s why they’re naturally seen as precursors of future consumer inflation rates (measured by the Consumer Price Index, or CPI).
After all, as long as the economy’s overall demand levels (reflecting overall growth levels) remain healthy, these businesses mostly will be able to pass these cost increases on to customers and actually will. Higher consumer inflation follows. So anything like the opposite is happening, and if producer prices are easing at all (even from historic highs), that’s got to be encouraging news on the consumer and overall inflation fronts.
But did the April yearly rate of increase really slow down? Maybe not. That’s because it’s a preliminary reading and, as shown by the left-hand column in the table below, since last September, every revision of that first estimate went up.
Jan 2021: 1.60 percent now 1.59 1.97 percent
Feb 2021: 2.96 percent now 2.95 1.11 percent
March 2021: 4.15 percent now 4.06 0.34 percent
April 2021: 6.51 percent now 6.43 -1.52 percent now -1.44
May 2021: 6.99 percent now 6.91 -1.10 percent now -1.01
June 2021: 7.56 percent now 7.49 -0.68 percent now -0.59
July 2021: 7.96 percent now 7.83 -0.25 percent now -0.17
Aug 2021: 8.65 percent now 8.58 -0.25 percent now -0.17
Sept 2021: 8.78 percent now 8.82 0.34 percent
Oct 2021: 8.87 percent now 8.90 0.59 percent
Nov 2021: 9.88 percent now 9.94 0.85 percent now 0.76
Dec 2021: 9.99 percent now 10.58 0.84 percent now 0.76
Jan 2022: 10.08 percent now 10.17 1.60 percent now 1.59
Feb 2022: 10.27 percent now 10.51 2.96 percent now 2.95
March 2022: 11.18 percent now 11.54 4.15 percent now 4.06
April, 2022: 11.03 percent 6.43 percent
Sure, the April revision could be a downgrade – like those between January and August, 2021. But the odds of an upgrade look pretty good.
Moreover, the right-hand column in the table shows that the baseline effect, which was cause for some optimism that inflation might peak before too long, is more over than ever.
As known by RealityChek regulars, the unusually high and robustly rising annual CPI and PPI figures for last year stemmed largely from the change they represented from unusually low inflation rates the year before – which were driven down by the arrival of the CCP Virus and the sharp recession it induced by prompting on-and-off lockdowns of huge chunks of the economy, and major behavioral caution by businesses and individuals alike.
What that right-hand column shows is that these effects – even with the slightly better revisions displayed above – were profound enough to result in actual PPI annual decreases from April, 2019-2020 through August, 2019-2020. (The right-hand column also brings the story up to 2020-2021 for January through April – the baseline comparison year for the first four data months of 2021-2022.)
That is to say, the table reveals that the economy’s recovery in 2021 from virus-ridden and downturn-y 2020 amounted to a great catching up process that largely explains the bloated PPI figures. (The other major factor was supply chain disruption resulting from the stop-and-start nature of some of the virus waves and lockdowns, and therefore of the recovery itself.)
But the above table also shows that the baseline effect began fading significantly this past February. That month, the annual PPI rise of 10.27 percent came off a February, 2020-2021 increase of 2.95 percent. The similar January annual increase of 10.08 percent, by contrast, came off a 2020-2021 rise of a much lower 1.59 percent.
And just look at April! That 11.03 percent annual PPI jump has followed a 6.43 percent increase between the previous Aprils.
Moreover, the same kind of trend (at lower absolute levels) is evident from the core PPI data, as shown below. Again, the left-hand column displays the annual increases by month starting in January, 2021. The right-hand column shows the annual changes by month for the year before – the baseline. The only possible significant difference is that I haven’t tracked the revision record for this core PPI series, so I don’t know if the latest April result is likely to be upgraded or downgraded, or unrevised.
Jan 2021: 1.79 percent 1.64 percent
Feb 2021: 2.33 percent 1.36 percent
March 2021: 3.15 percent 1.00 percent
April 2021: 4.81 percent -0.09 percent
May 2021: 5.25 percent -0.18 percent
June 2021: 5.60 percent 0.09 percent
July 2021: 6.01 percent 0.27 percent
Aug 2021: 6.19 percent 0.36 percent
Sept 2021: 6.14 percent 0.72 percent
Oct 2021: 6.26 percent 0.90 percent
Nov 2021: 7.04 percent 0.99 percent
Dec 2021: 7.18 percent 1.17 percent
Jan 2022: 6.91 percent 1.79 percent
Feb 2022: 6.76 percent 2.33 percent
March 2022: 7.10 percent 3.15 percent
April, 2022: 6.92 percent 4.81 percent
The big takeaway here: Even more than yesterday’s April Consumer Price Index report, today’s release on the Producer Price Index is saying that alarmingly high inflation is here to stay for Americans for the forseeable future. It’s possible that the Federal Reserve, the U.S. government agency mainly responsible for handling inflation, can tighten monetary policy (to reduce that aforementioned consumer demand and in turn growth) skillfully enough to engineer a “soft landing” for the economy – i.e., bring price increases back to much less damaging levels while avoiding a recession. But keep in mind that the next time the central bank achieves this goal starting from inflation rates this hot will be the first.
RealityChek 
No mention of our massive increase in oil and fuel prices (GND) and how it hits us multiple times through the Supply chain. Oil plays a key role in one fertilizer (up over 100%), then used for heavy equipment (tractors, combines), transportation of raw materials to final goods.
But at least I mentioned the difference between headline and core PPI. And in yesterday’s CPI post, I pointed out that the distinction between the two is getting awfully academic, precisely because, as you note, energy prices affect so many other prices. So give me a little credit!
I follow you. (Smile.) A little wonky, but I like wonky, like Dr. Thomas Sowell and Dr. Walter Williams.
I don’t think Sundance at The Cinservative Treehouse has the academic chops, but he is insightful and predicted much of this inflation. He does have a useful background in the grocery / distribution business.
CTH: ” Note that Intermediate Demand Processed foodstuff prices grew at 2.9% in April. Annualized that is a 34.8% increase in price. This is the scale of future price increases we are likely to see at the supermarket. That 35% rate of inflation for center store products is exactly what CTH predicted for the third wave of price increases.
“The Intermediate Demand Unprocessed foodstuffs, increased in price by 2.5% in April, those foodstuffs are entering the wholesale market at a 30.0% annualized rate of inflation vs last year.”
Ugh.
https://theconservativetreehouse.com/blog/2022/05/12/producer-price-inflation-continues-surging-at-11-percent-annualized-processed-food-increases-now-34-8-percent/#more-232975