, , , , , , , , , , , , , , , , ,

In Wednesday’s post, I wrote that I was somewhat surprised about the new (and somewhat encouraging) official U.S. data for consumer inflation in July because June’s figures for what’s often called wholesale inflation were so bad. Because when the prices businesses charge each other to turn out the goods and services they sell, they typically compensate by passing these higher costs on to consumers.

But I actually shouldn’t have found those latest Consumer Price Index (CPI) numbers so unexpected. As I’ve pointed out before (e.g., here) such higher costs can be passed along only if consumers go along. So I should have recognized the better (but still far from good) CPI results as a sign that consumers are starting to balk – by cutting back their spending to some extent.

And significantly, yesterday’s official Producer Price Index (PPI) results for July suggest that businesses themselves began protesting higher prices and cutting back on purchases of their own inputs. That is, they may represent another example backing the adage that the best cure for high prices is high prices. 

In fact, in all the important ways, the new figures for both “headline” producer inflation and its “core” counterpart (which strips out energy and food prices supposedly because they’re volatile for reasons having little at best to do with the economy’s fundamental vulnerability to inflation) strongly resembled those for consumer inflation.

Both the headline and core PPI indices barely rose sequentially (reflecting a bit of “price rebellion,” and worsened on annual bases at a pace that was the slowest in many months, but still alarmingly high in absolute terms. Further, as with the CPI, the big reason for this improvement was the drop in energy prices. And both annual CPI and PPI rates remain worrisome because they’re coming off results for the previous year that were also historically torrid.

One prime indicator of how dramatically energy has affected these results comes from the month-to-month headline PPI numbers.

By this measure, producer prices sank by 0.50 percent (yes, “sank” – didn’t just “rise more slowly”) in July– the first such drop since April, 2020 (1.27 percent) when the first wave of the CCP Virus was wreaking its maximum damage on the economy. And this milestone followed a June monthly increase of 1.01 percent. The percentage-point swing between these two figures (1.51) was the greatest on record (though to be fair, this data series only goes back to late 2009).

The evidence for energy’s leading role? The July sequential fall-off of 8.96 percent (the first such decline since last December’s 1.42 percent and the biggest since since the 16.85 percent nosedive in peak pandemic-y April, 2020) came on the heels of June’s 9.41 percent increase – the biggest since June, 2020’s 9.99 percent, as the economy was recovering rapidly from that first virus wave, related lockdowns and other mandated restrictions, and voluntarily reduced activity. In addition, the percentage-point swing of 18.37 was the biggest since the 18.40 shift between the April, 2020 energy price crash and the May, 2020 rebound.

As for core producer prices, they crept up by just 0.15 percent on month in July. That’s the smallest such increase since last December’s 0.17 percent increase. And they displayed little volatility, as the 15 percentage-point difference between June’s rise of 0.32 percent and July’s was exactly the same as that between the June advance and May’s of 0.47 percent.

The annual PPIs tell a similar story of energy price dominance.

Headline producer inflation was up 9.69 percent on a year-on-year basis in July – the lowest such increase since last October’s 8.90 percent. And percentage-point difference between the July annual decrease and June’s of 11.25 percent (1.56) was the biggest since producer prices strengthened by 0.36 percent on an annual basis in March, 2020, as the virus arrived in the United States in force, and then weakened by 1.44 percent in April (a 1.76 percentage point difference).

And once again, energy prices were the big driver.

In July, they jumped 27.59 percent year-on-year. But even that blazing pace was dwarfed by June’s 53.54 percent annual surge – the biggest on record (again, going back only to late 2009), and well ahead of the previous all-time high of 47.71 percent in April, 2021 (a figure strongly bolstered by the baseline effect, since in peak pandemic-y April, 2020, annual energy prices crashed by 30.20 percent.

The percentage-point gap between the June and July results were the widest ever, too – 25.95. The previous record was the 24.56 percentage point difference between that record 47.71 percent annual spurt increase in April, 2020 and the previous month’s rise of a relatively modest 23.15 percent. 

Since it doesn’t include energy prices, annual core PPI’s ups and downs – like those of monthly wholesale inflation – have been pretty tame in comparison.

The July increase of 5.75 percent was the best such performance since June, 2021’s 5.60 percent. And the annual rate of increase has now slowed for four straight months.

July’s annual core PPI rise was also an impressive 0.82 percentage points less than the June figure of 6.38 ercent. But that gap was only the biggest since May, 2020’s 0.62 percentage-point difference over the April results.

This relatively gradual drop in core PPI on a yearly basis (which RealityChek regulars know is a more reliable gauge of the trends in the monthly numbers because the longer timespan measured smooths out inevitably random short-term fluctuations) is the most compelling evidence that headline producer and consumer prices will remain worrisomely high for the foreseeable future.

This scenario isn’t inevitable. Maybe Americans can count on energy prices continuing to decline month-to-month long enough to bring annual inflation rates down in absolute terms. And maybe even they don’t, high energy prices won’t start boosting prices throughout the rest of the economy. But those developments can only be reasonably expected if consumer and business spending weakens enough to produce sluggish overall economic growth and even a recession.

Such a downturn is probably the price the nation has to pay to extinguish inflationary fires. The big problem is that, without a serious focus on reversing the long and possibly worsening U.S. slump in productivity growth, other than relief from the current cost of living crisis, the public – and especially the poorest Americans – probably won’t receive any major and solidly grounded living standards payoff from such a victory.