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Today’s official government report on U.S. wholesale prices (for May) is a perfect example of why it’s impossible to understand inflation without taking into account the baseline effect – the distortions that can result especially in year-on-year figures from wildly different points of comparison.

Specifically, if one set of annual results for any data series is abnormal (either unusually high or unusually low) that deviation is bound to influence the rate of change for the following year, and produce readings that are easy to misinterpret.

That’s why it’s not particularly important that, on an annual basis, the rate of overall (“headine”) wholesale inflation (as measured by the Producer Price Index, or PPI) has actually slowed slightly since March, or that such slowing has been seen since last November in the core PPI rate. (As with the core Consumer Price Index, or CPI, the core PPI strips out food and energy prices – along with trade services – because they’re volatile for reasons supposedly unrelated to the economy’s underlying inflation “prone-ness”). 

In fact, given the baseline effect plus the fact that both PPIs are seen as strong indications of consumer inflation rates to come — because they measure how much businesses charge each other for the goods and services they turn into final products offered to households and individuals — today’s report almost certainly means that the cost of living will keep soaring for the foreseeable future. For the baseline effect, which for much of last year could be used as an excuse for the robust consumer and producer inflation already being seen then, has been gone for months.

After all, the latest months’ worth of annual wholesale price increases represent comparisons with their results for a stretch in 2021 when these PPIs were already growing worrisomely fast. The increases in preceding months were coming off a comparison period during which these prices were still rising unsually slowly. They were still experiencing the hangover from the brief but sharp 2020 recession induced by the CCP Virus and related lockdowns and voluntary behavior curbs. In other words, a catch-up effect had been at work.

The tables below should make these points clear, starting with the headline annual PPI results by month starting with January, 2021. The right-hand column represents the baseline figure for the left – in other words, the results that month for the previous year. So, for example, the baseline for January, 2021’s 1.60 percent headline annual PPI increase was the 1.97 percent wholesale inflation recorded between January, 2019 and January, 2020. And the baseline figures for the 2021-22 results are the corresponding figures for 2020-21.

Jan 2021: 1.59 percent                  1.97 percent

Feb 2021: 2.95 percent                 1.11 percent

March 2021: 4.06 percent             0.34 percent

April 2021: 6.43 percent              -1.44 percent

May 2021: 6.91 percent               -1.01 percent

June 2021: 7.56 percent               -0.59 percent

July 2021: 7.96 percent                -0.17 percent

Aug 2021: 8.65 percent               -0.17 percent

Sept 2021: 8.78 percent                0.34 percent

Oct 2021: 8.87 percent                 0.59 percent

Nov 2021: 9.88 percent                0.76 percent

Dec 2021: 10.18 percent              0.76 percent

Jan 2022: 10.18 percent               1.59 percent

Feb 2022: 10.52 percent              2.95 percent

March 2022: 11.55 percent          4.06 percent

April, 2022: 10.89 percent           6.43 percent

May, 2022 10.66 percent             6.91 percent

As should be clear, although the annual pace of last month’s PPI inflation (10.66 percent) was a little lower than either April’s 10.89 percent or March’s 11.55 percent, the baseline figure during that period has jumped from 4.06 percent (which historically speaking was already lofty) to 6.91 percent. So there’s obviously explaining the latest figures with the catch up effect. Indeed, using historical standards, the catch up effect ended in February.

The core PPI inflation figures shown in the table below are lower in absolute terms, but the story they tell is otherwise almost identical. As with the first table, the figure in the right-hand column represents the previous year’s comparison point for the figure in the left-hand column.

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: 7.09 percent                1.17 percent

Jan 2022: 6.90 percent                 1.79 percent

Feb 2022: 6.76 percent                2.33 percent

March 2022: 7.14 percent           3.15 percent

April, 2022: 6.78 percent            4.81 percent

May, 2022: 6.74 percent             5.25 percent 

So sure, May’s 6.74 percent annual core wholesale price rises were the best such results since last October’s 6.26 percent. But that latter number came after a baseline year when there was practically no wholesale inflation (0.90 percent) at all. By contrast, the baseline number for May’s PPI increase was more than five times higher (5.25 percent).

At some point, the business cost pressures shown in the PPI will ease to acceptable rates, and consumer cost pressures will follow. But the longer elevated inflation of both kinds lasts, the likelier that beating back these price surges will require policy moves that depress consumer demand enough to produce a recession — possibly a deep one. And today’s PPI report is the latest sign that there’s still lots of momentum behind current U.S. inflation.