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The U.S. government issued another inflation report today – covering wholesale prices for January – that was not only troublingly hot like yesterday’s consumer price figures, but hot in very similar ways. Specifically, it showed monthly acceleration, and a strong baseline effect (of the wrong kind) in the annual numbers.

Consequently, as with yesterday’s Consumer Price Index (CPI) results, they appear to discredit Federal Reserve Chair Jerome Powell’s belief that the beginnings of disinflation (a slowdown in the rate of price increases, as opposed to actual price decreases) have begun to appear.

As known by RealityChek regulars, the results of this Producer Price Index (PPI) often but don’t always prefigure changes in consumer prices. Of course, companies always want to pass on higher prices to consumers (or to their corporate customers), but have no interest per se in passing on savings to any customers when their costs fall. The exceptions: When they’re striving for growth or market share – at any cost.

Instead, companies’ pricing power depends most importantly on levels of demand for their goods or services. When it’s healthy, pass-through is usually possible whatever their costs are. When demand is weak, it’s much tougher. And as long as consumers in particular are able and willing to spend, PPI reports like today indicate that consumer inflation will remain higher than almost anyone wants, and could well speed up.

The monthly quickening of the PPI took place both in the headline read and its core counterpart – which strips out food, energy, and trade services prices because they’re supposedly volatile for reasons having almost nothing to do with the economy’s fundamental vulnerability to inflation. 

For the former, prices jumped by 0.66 percent on month in January. That was both the biggest increase since last June’s 0.93 percent, and the biggest absolute monthly percentage point swing (from December’s upwardly revised 0.22 percent dip) since peak pandemic-y May, 2022. Since October, these results have been preliminary, so they’ll surely change – but if form holds, not very much.

For core PPI, prices were up 0.59 percent sequentially in January – the worst such figure since last March’s 0.91 percent. It was the biggest percentage point move over December’s (upwardly revised 0.19 percent gain) since last March, too.

Also as with the CPI numbers released yesterday, baseline analysis reveals that both annual January PPI increases are coming off strong increases for the year making clear that businesses believe that they still have lots of pricing power.

On the surface, the annual headline PPI advance of 6.03 percent looks reasonably good. It’s a nice improvement from December’s 6.46 percent, and indeed the best such performance since the 4.07 percent recorded back in March, 2021.

But the January read was coming off a PPI surge between the previous Januarys of 10.18 percent. December’s increase was coming off another high baseline figure: 10.20 percent. It’s somewhat encouraging that the new annual January PPI advance was a good deal weaker than December’s even though the baseline figures remained almost unchanged.

But that March, 2021 PPI increase was coming off a March, 2019-20 increase of a negligible 0.34 percent. In other words, the annual March headline PPI increase represented catch-up from the abnormally low result for 2019-20 that was clearly produced by the sharp economy-wide downturn generated by the CCP Virus. No such catch-up has been taking place in recent months.

So unless you think that a national business community that’s raised wholesale prices by some 10 percent one year and about six percent the following year is shy about pricing power, it’s clear that, at the very least, producer and consumer inflation will remain troublingly elevated for the foreseeable future.

Almost the same trends have unfolded for annual core PPI. The January yearly increase was 4.53 percent, lower than December’s 4.70 percent and the weakest yea-on-year read since March, 2021’s 3.15 percent.

But the January increase followed a previous annual rise of 6.89 percent and the December baseline figure was a comparably torried 7.13 percent. The baseline figure for March, 2021? Minus 0.18 percent. That is, wholesale prices fell between March, 2019 and March, 2020. The CCP Virus-related catch-up effect then is as obvious as the absence of any catch-up nowadays. So is the robust pricing power businesses believe they have.

It’s conceivable, but just barely so, that this picture will change meaningfully by upcoming release of the inflation data preferred by the Fed – the Price Index for Personal Consumption Expenditures (PCE). If it doesn’t, and if a combination of low unemployment and astronomical federal spending keeps most consumers’ wallets and pocketbooks fat enough to support vigorous spending, it’s hard to see how the Fed not only keeps trying to slow the economy by raising interest rates and keeping them “higher for longer,” but steps up its campaign by hiking them faster. And the longer it takes to beat inflation, the worse the desired economic weakening is likely to be.