(What’s Left of) Our Economy: Why Even the New Great U.S. Wholesale Price Results Don’t Warrant Inflation Optimism

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consumer inflation, core PPI, cost of living, CPI, energy prices, food prices, inflation, PPI, Producer Price Index, recession, wholesale inflation, {What's Left of) Our Economy

No doubt about it – the excellent official U.S. wholesale inflation numbers that came in this morning set up a fascinating and important test of what the main drivers of consumer price increases really are. This Producer Price Index (PPI) of course measures the rises and falls in how much businesses charge each other for the goods and services they pay to supply the demand of their final customers (be they other businesses or households and individuals).

If such encouraging numbers keep getting released, will they make clear that the costs companies pay for their inputs play the predominant role? Or will they demonstrate that the crown goes to levels of consumer demand itself? RealityChek regulars know that I’ve backed the second proposition, still do, and believe that inflation will revive even if major business costs keep falling. So I’ve got some reputational skin in this game, too.

If you doubt that today’s results (for March) were excellent, check them out. Headline PPI improved for the consecutive time month-to-month and decreased in absolute terms by 0.50 percent. That’s not disinflation (prices still rising, but more slowly). That’s deflation (prices actually falling). And this sequential drop was the biggest since April, 2020’s tumble of 1.19 percent.

Negative revisions were something of a fly in the ointment. But they weren’t big enough to change the bigger positive picture.

Headline PPI slowed on an annual basis in March, too, and for the ninth straight time. Further, the 2.79 percent yearly growth was the slowest since January, 2021’s 1.68 percent, and the difference with February’s downwardly revised 4.54 percent (1.75 percentage points) was the greatest of the current high inflation period. In fact, the only figure that comes close is the 1.49 percentage point drop between the January and February annual numbers. So that has to indicate powerful downward momentum for wholesale inflation.

So does baseline analysis. The new annual March headline PPI rate of 2.79 percent followed an increase between the previous Marchs of 11.59 percent. That means that between February and March this year, PPI fell considerably faster than the baseline figures for those results rose – which signals that businesses believe they have much less pricing power.

Moreover, the aforementioned 1.68 percent January, 2021 annual wholesale inflation rate followed PPI from January, 2019 to January, 2020 of 1.97 percent. So there was nothing unusual in baseline terms about the latter figure. Rather than indicate great momentum or a catch-up effect, it was a sign of wholesale inflation stability.

The core PPI results strip out prices in energy, food, and a category called transportation services – supposedly because they’re volatile for reasons having little or nothing to do with the economy’s fundamental vulnerability to major price increases (or decreases). And they were outstanding as well.

On a monthly basis, core PPI weakened in March for the second consecutive time, too, and the sequential increase of 0.07 percent was the best such result since these prices sank by 0.81 percent in April, 2020.

In annual terms, core wholesale inflation also cooled for the second straight month, and the March rise of 3.67 percent was the best such result since March, 2021’s 3.15 percent. Moreover, the 0.87 percentage point retreat between the February and March yearly results was also by far the most during the current high inflation period.

A glowing assessment of these annual core PPI figures also holds up well under the baseline analysis microscope. As with annual headline PPI, between February and March, this number’s 0.87 percentage point fall was considerably bigger than the worsening of their 2021-2022 baseline figures (0.31 percentage points, from 6.75 percent to 7.06 percent).

And as with annual headline PPI, in my view, this very rapid core PPI progress outweighs in importance the fact that the baseline figure for that March, 2021 3.15 percent wholesale inflation rate was a measly 0.10 percent. Why? Because by that baseline date of March, 2020, the economy was obviously being engulfed by the CCP Virus pandemic and lockdowns and voluntary behavioral curbs. So the year after, some catch-up was clealy taking place.

In other words, the situation was much different than that for the January, 2021 annual headline PPI result mentioned above – because that baseline figure was pre-pandemic.

Yet bringing the virus into these equations points to the big potential (and IMO, likely) downside of this PPI progress – and indeed of the less impressive consumer inflation data that came out yesterday. It also supports the case that overall levels of economic demand are the main determinants of inflation, and especially consumer inflation.

For it’s no coincidence that so many of the good PPI results spotlighted in this post date are the best since April, 2020. That month was the nadir of the deep (but thankfully brief) depression into which the pandemic threw the nation. Consumers dramatically reduced overall spending.  Therefore, companies’ orders for inputs needed to supply that consumption plummeted as well, all of which sharply reduced all business pricing power. 

Although no such scary downturn is on the horizon now, the signs keep multiplying that some kind of slump will begin before too long. (See, e.g., here.) And as long as this scenario unfolds, producer and consumer prices will surely keep easing – because of weakening demand. 

But here’s where the test I’m anticipating comes in. As explained most recently in yesterday’s consumer inflation update, I don’t expect prices to disinflating or even stabilizing for much longer because a presidential (and Congressional) election is approaching. Consequently, politicians seeking to keep voters happy will soon start working overtime to make sure that consumers will have a decent amount of money to spend – thereby propping demand back up again.

This buoyed demand is likely to restore whatever business pricing power confidence may have been ebbing recently.  Consequently, I predict that companies will start raising prices vigorously again even as their own cost pressures (especially on the labor and supply chain fronts) continue easing. Therefore, prices will gain new momentum simply because companies can increase them, not because of any changes in what they’re paying for goods and services.

Skeptics should think of it this way: If consumers keep on paying higher prices, why would businesses not keep charging them?   

As just indicated, this re-inflationary process will take some time to play out.  But I promise to vigilantly monitor how well my predictions hold up. And you should feel free to hold my feet to the fire, too.          

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(What’s Left of) Our Economy: Better Wholesale U.S. Inflation but Consumers May Never Notice

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consumer inflation, core PPI, cost of living, CPI, Federal Reserve, inflation, interest rates, monetary policy, PPI, Producer Price Index, producer prices, wholesale inflation, wholesale prices, {What's Left of) Our Economy

Today’s official report on U.S. producer price inflation could teach an important lesson on why prices move up and down in various circumstances.

Because the Producer Price Index (PPI) measures the costs of various inputs businesses sell to other business customers, it can often signal where consumer prices are going – especially when these costs go up. After all, when the goods and services bought by businesses go up, they feel understandable pressure to compensate by raising the prices they charge their customers – including individuals and households.

But as RealityChek regulars know, businesses can’t always pass on higher costs to their final customers. That’s because these customers don’t always feel that they can afford to pay higher prices (except, to a great extent, for essentials). So if demand isn’t strong enough, higher producer, or wholesale, prices don’t always translate into higher consumer prices, and the businesses serving consumers often need to suffer lower revenues and/or profits.

To complicate matters further, when business’ costs go down, there’s no inherent reason for businesses to lower the prices they charge their final customers – especially if demand remains strong enough. Unless they’re chasing market share? Or unless anyone thinks that they regularly, or even ever, like to give their customers price breaks just for the heck of it?

So since consumer demand remains strong – as made clear just yesterday by the official U.S. consumer inflation report for February – my sense is that the new PPI data don’t have much predictive power when it comes to living costs.

That’s a shame, since those wholesale prices results are pretty good in and of themselves. Headline PPI actually fell on month in February, by 0.15 percent – the best such result since last July’s 0.28 percent dip. Moreover, January’s torrid initially reported increase of 0.66 percent (the worst such result since last June’s 0.91 percent jump) has been revised down to a rise of 0.34 percent.

The unusually good monthly number for February could simply reflect some mean reversion from January. (That downward revised figure is still the highest since last June.) Indeed, that terrible June result was followed by the July 0.28 percent decrease. But let’s stay glass-half-full types for now.

Core producer price inflation cooled nicely on month in February, too. This measure (which strips out food, energy, and trade services prices supposedly because they’re volatile for reasons having little to do with the economy’s fundamental inflation prone-ness), pegged sequential wholesale price increases at 0.21 percent.

That figure was well off January’s 0.50 percent – the worst since last March’s 0.91 percent. And it in turn was revised down from the initially reported 0.59 percent. Some mean reversion could be at work here, too, but since last June (as has not been the case for headline PPI), core PPI has been pretty range-bound between 0.20 and 0.29 percent.

Not even taking baseline effects into account undermine the February wholesale inflation results fatally. On an annual basis, headline PPI in February climbed by 4.59 percent. That was the best such result since March, 2021’s 4.08 percent, and a big decrease from January’s data (which were revised down from 6.03 percent to 5.71 percent.

In addition, the February figure comes off headline PPI of 10.56 percent between the two previous Februarys. Those back-to-back results still indicate that businesses that sell mainly to other businesses still believe they have plenty of pricing power – especially given that the baseline figure for March, 2021 was a rock bottom 0.34 percent due to the steep CCP Virus-induced economic downturn. But the big difference between the sets of January and February, 2023 numbers also signal that this confidence has been dented.

Even better, January’s 5.71 percent headline wholesale price inflation followed a 10.18 percent increase during the previous Januarys. A decrease in the 2023 figures considerably bigger than the increase in the 2022 figures also points to wholesale inflation losing not trivial steam.

The annual core PPI story isn’t quite so good, but contains some encouraging news. The February advance of 4.44 percent was only a bit down from January’s 4.45 percent. But it was the lowest such rate since March, 2021’s 3.15 percent, and the January figure was revised down from 4.53 percent.

Baseline analysis, however, shows that pricing power in the economy’s core sectors remains ample. The January and February annual core PPI results followed previous annual increases of 6.89 percent and 6.75 percent, respectively. So they didn’t duplicate the heartening headline PPI pattern of 2023 annual PPI falling faster than its 2022 counterparts.

Moreover, back in March, 2021, when annual core PPI was running at 3.15 percent, the baseline figure for the previous March’s was just 0.10 percent. That is, there was almost no core PPI inflation – because of the sharp CCP Virus-induced slump. So it’s obviously too soon to declare victory over this kind of price increase.

But although this fairly good PPI report may tell us little or even nothing about future inflation, it will affect the nation’s cost of living in one significant if indirect way:  Like yesterday’s consumer price report, it was probably good enough to enable the Federal Reserve to slow or pause its anti-inflation interest rate hikes and other monetary policy moves in order to contain the new banking crisis while claiming that such chickening out won’t send price increases spiraling still higher.  At least not yet right away.   

(What’s Left of) Our Economy: Signs of the Wrong Kind of Inflation Progress

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baseline effect, Biden administration, core PPI, cost of living, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, producer prices, recession, SPR, stimulus, Strategic Petroleum Reserve, wholesale inflation, {What's Left of) Our Economy

Yesterday’s official U.S. report on wholesale price inflation (for December) finally contained some modest signs of genuine cooling, but that’s not necessarily good news. The biggest reason seems to be a significant slowing in the nation’s economic growth and further confirmation that America remains far from creating a truly healthy economy – one that can expand adequately without either racking up towering debts or, more recently, igniting decades-high price increases.

As I’ve written previously, changes in this Producer Price Index (PPI) influence changes in consumer prices, but the relationship is more complex than often thought. Because wholesale prices represent costs for producing the goods and services that businesses sell to each other and to consumers, companies understandably try to pass increases on to their final customers – but can’t always do so.

That’s because the final result depends on these customers’ buying power. If they’ve got lots of it, chances are they’ll pay up, enabling businesses to preserve and even boost profits. If they don’t, they won’t, and margins will suffer with one big caveat – the ability of the sellers to become more efficient, and generate cost-savings elsewhere.

At the same time, if final customers feel flush with cash and/or credit, the businesses that supply them won’t necessarily, or even often, cut their selling prices if their costs decrease or stabilize. Why should they? With certain exceptions (like a prioritizing gaining market share), they’ll naturally charge whatever their customers seem willing to pay. 

And because some major signs of mounting economy-wide weakness have appeared recently (especially falling consumer spending), that new evidence of softer wholesale prices seems to add to the evidence that a recession of some kind is looming.

The best wholesale inflation news came in the new monthly numbers. The headline figure actually fell by 0.50 percent between November and December. That’s the most encouraging such result since this PPI dropped 1.29 percent sequentially in April, 2020 – when the CCP Virus’ first wave plunged the economy into a short but steep slump.

The core figure (which strips out food, energy, and a category called trade services, supposedly because they’re volatile for reasons largely unrelated to the economy’s fundamental vulnerability to inflation), did rise month-to-month, but only by a tiny 0.09 percent. That was the best such result since a fractionally lower figure in November, 2020.

Almost as good, the revisions for both for recent months didn’t meaningfully change this picture – though they do remind that PPI data can change non-trivially during the several months when they’re still considered preliminary.

The annual headline and core PPI figures did exhibit something of the baseline effect that always should be kept in mind when evaluating economic trends. That is, it’s essential to know whether improvements of worsening of data merely represent returns to a longer-term norm after stretches of abnomality. In the case of post-CCP Virus inflation readings, the big spike in price increases that began in early 2021 largely reflected a (ragged) normalization of economic activity and business pricing power that followed many months in 2020 when both were unusually subdued.

But for both measures of wholesale prices, the baseline effect appeared to be fading. For headline PPI, the December annual increase was 6.22 percent – the best such result since March, 2021’s 4.06 percent, and a big decline from November’s downwardly revised 7.34 percent. The baseline figure (headline annual PPI from December, 2020 through December, 2021) was a terrible 10.18 percent. But it was only slightly higher than its November counterpart of 9.94 percent.

Since the scariest aspect of inflation is its tendency to feed on itself, and keep spiraling higher, that feeble increase in the baseline figure over the last two months could well signal a loss of momentum. 

The annual core PPI statistics tell an almost identical story. The latest annual December increase of 4.58 percent was considerably lower than November’s upwardly revised 4.91 percent, and the best such result since May, 2021’s 5.25 percent. But the December baseline increase of 7.09 percent was barely faster than November’s 7.03 percent.

At the same time, the same kinds of big questions that hang over the consumer inflation figure hang over the wholesale inflation figure. For example, the annual increase in wholesale energy prices nosedived last year from 57.05 percent in June to just 8.58 percent in December. On a monthly basis, they’ve plummeted in absolute terms since June by 21.18 percent.

But these impressive results stemmed mainly from historically large releases of oil from the nation’s Strategic Petroleum Reserve (which of course expanded supply) and the Chinese economic growth that was severely depressed by dictator Xi Jinping’s wildly over-the-top Zero Covid policy. and therefore dampened global oil demand enough to affect prices in the United States.

The petroleum reserve, however, is now down to its lowest level in 39 years, which explains why far from contemplating further sales, the Biden administration is now slowly starting to refill it. Morever, China has now decided (for now) to reopen its economy, which will again put upward pressure on energy prices.

In addition, one lesson that Americans should have learned from this latest spell of inflationis that wages and other forms of income (including investment income) are hardly the only sources of consumer buying power. The government can supply oceans of it, too, and as I wrote yesterday, it’s entirely possible that U.S. politicians and Federal Reserve officials become recession-phobic that they decide to subsidize Americans’ buying power again. Hence my medium-term forecast of stagflation – a stretch of uncomfortably low growth and stubbornly high prices. 

That’s certainly better than a future of continually rising inflation. But anyone describing the current and likely economic situation facing Americans as “good” is using a depressingly low bar.

(What’s Left of) Our Economy: Why U.S. Inflation Hopium is Looking Pretty Inflated

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baseline effect, consumer inflation, core PPI, Federal Reserve, inflation, Labor Depatment, PPI, Producer Price Index, producer prices, wholesale inflation, wholesale prices, {What's Left of) Our Economy

Sorry to rain on the parade of the optimists, but this morning’s official data on wholesale prices (for November) signal that another month is about to pass with no serious evidence that troublingly high U.S. inflation has peaked.

These wholesale price figures (called the Producer Price Index, or PPI, by the Labor Department, which monitors these trends) represent what businesses charge each other for the inputs they buy to produce the goods and services they sell their final customers. Quite naturally, they typically (though not always) presage more inflation down the road on the consumer front, since these businesses will try to pass on as many of these costs as they can. And as I’ve argued previously, (e.g., here) the multi-decade worst consumer inflation numbers of the last two years or so show that they (accurately) believe they have lots of such pricing power.

The headline PPI sequential increase for November actually did cool – but only fractionally, from 0.31 percent month-to-month in October to 0.30 percent. Moreover, even though it was one of the smaller increases this year, this October result – as was the case for September and August – was revised up. (And they’ll be revised further in next month’s release.)

As with consumer inflation figures, the PPI reports include a “core figure” that leaves out food and energy price developments because they’re supposedly volatile for reasons having nothing to do with the economy’s underlying vulnerability to inflation. (The core PPI also omits a transportation-related category called “trade services.)

These monthly numbers were slightly worse than their headline counterparts. November’s sequential increase of 0.27 percent topped October’s 0.19 percent and again, even though these are among 2022’s weakest readings, the October, September, and August results were all revised up.

The annual figures look better – but only if you forget about the baseline effect. That is, when these numbers are compared with those of the previous year, they make clear that businesses believe they still have plenty of pricing power.

In this vein, November’s annual headline PPI inflation of 7.39 percent was the best such result since the 6.91 percent registered in May, 2021. And it seems to be progress from October’s 8.10 percent (which itself was upwardly revised). But this October’s annual headline PPI increase came off an 8.90 percent rise between the previous Octobers. This November’s annual headline PPI increase comes off a much worse 9.94 percent result between the previous Novembers.

The 4.87 percent annual worsening of core wholesale prices was also the best such result since May, 2021 (when the read was 5.25 percent). It also beat the 5.44 percent annual number for October.

But that October annual core PPI increase (which has also been revised up) came off wholesale inflation of 6.26 percent between October, 2020 and October, 2021. The “comp” for November is a significantly higher 7.03 percent.

Don’t get me wrong.  Both wholesale and consumer inflation will come down to acceptable levels at some point (no doubt because of a combination of consumers running out of the mammoth savings built up because of shriveled peak-pandemic spending opportunities and then big government stimulus programs;  and the Federal Reserve’s strategy of fighting inflation by slowing economic growth dramatically). 

Until then, however, reports of peak inflation will resemble nothing so much as Mark Twain’s supposed description of reports of his death – “greatly exaggerated.” 

(What’s Left of) Our Economy: Are High Prices Starting to Cure Wholesale Inflation, Too?

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consumer inflation, consumer price index, consumer prices, core inflation, core PPI, cost of living, CPI, energy, energy prices, inflation, living standards, PPI, Producer Price Index, productivity, recession, wholesale inflation, wholesale prices, {What's Left of) Our Economy

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.