(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.   

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(What’s Left of) Our Economy: Contra the Fed, No Disinflation’s Visible in the New Wholesale Price Figures

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consumer price index, consumer prices, cost of living, CPI, Federal Reserve, inflation, PPI, pricing power, Producer Price Index, wholesale inflation, {What's Left of) Our Economy

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.

(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: That New Wholesale U.S. Inflation Report was Underwhelming, Too.

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consumer prices, core inflation, cost of living, Federal Reserve, inflation, PCE, personal consumption expenditures index, PPI, Producer Price Index, wholesale inflation, {What's Left of) Our Economy

This morning saw the release of another official report on U.S. inflation that apparently everyone except me loves. It dealt with wholesale prices – what businesses charge each other to turn out the goods and service they wind up selling to their final customers. Therefore, they tend greatly to influence consumer prices down the line. And my lack of enthusiasm stems largely from the same kind of baseline considerations that bugged me about the latest consumer inflation release that delighted so many.

Not that baseline considerations weren’t my only problem with this latest read on the Producer Price Index (PPI), which covered October.

The strongest reasons for PPI optimism came from the monthly results of core PPI – which strips out food and energy prices supposedly because they change for reasons having little or nothing to do with the economy’s underlying vulnerability to inflation. (Unlike the official consumer price figures, this measure of core inflation also excludes the numbers for a category called trade services.)

October’s headline sequential core producer price increase was 0.17 percent. It was the weakest pace since July’s 0.16 percent, and revisions were big and positive for both September and August. (i.e., they went down.) Moreover, the recent monthly PPI increases are a far cry from those earlier in the year, when they peaked at 0.95 percent in March.

The story wasn’t as encouraging for the monthly headline PPI results. October’s 0.22 percent rise was only the slowest since August, when wholesale prices dipped 0.05 percent. And revisions were minimal. That means that the PPI is now up two months in a row after declining for two straight months. So where does the momentum lie? That’s not entirely clear to me.

And the year-on-year results impressed me even less because the comparisons with the previous year make clear that on this basis, producer inflation has lots of momentum.

Take core PPI. October’s annual increase of 5.38 percent was not only a nice step down from September’s downwardly revised 5.61 percent. It was the most sluggish pace since May, 2021’s 5.25 percent. But between the previous Mays, prices had actually sagged by 0.18 percent – because of the economy’s big CCP Virus-induced downturn. So the May, 2020-2021 number looked to me like nothing more than a return to normal (and in fact, such considerations convinced me for many months that recent price increases would indeed be transitory).

But the October annual PPI increase was coming off an October, 2020-21 spurt of 6.26 percent. By contrast, when annual PPI crested this year, at 7.11 percent in March, the baseline figure was just 3.15 percent – only about half as high. That tells me that businesses last month believed they still had plenty of (inflationary) pricing power despite their great success in charging their customers much more over the previous twelve months.

The headline annual results look very similar, with one notable exception. The October yearly PPI increase of 7.97 percent was both much lower than September’s downwardly revised 8.44 percent and the best such result since July, 2021’s 7.83 percent. But as with the core PPI figures, that increase was coming off a pandemic-y wholesale price decrease of 0.17 percent between the previous Julys.

And when headline annual PPI inflation topped out this year (so far) at 11.67 percent in March, that increase followed an annual rise between the previous Marchs of 4.06 percent. The latest October annual increase follows an October, 2020-21 jump of 8.90 percent – more than twice as high. So that’s another sign that businesses remain awfully confident about their pricing power – and that companies that supply consumers will be faced with major cost increases for months to come.

Moreover, as I’ve pointed out, those consumers still have lots of money to spend, and will receive more in the near-term future. So it’s likely that they’ll keep paying up for the time being however much they may grumble. Until serious signs appear that they’re getting tapped out, keep expecting inflation to stay alarmingly high, too. 

P.S. The next official U.S. inflation report comes out December 1, and it’s the Federal Reserve’s favorite measure of consumer price trends.  Stay tuned!

(What’s Left of) Our Economy: Too Much Irrational Exuberance Today on U.S. Inflation

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consumer price index, core CPI, CPI, Federal Reserve, inflation, interest rates, monetary policy, personal consumption expenditures index, Producer Price Index, {What's Left of) Our Economy

Wall Street is ecstatic about today’s official report on two measures of consumer inflation, and President Biden is pretty pleased, too. Both see improvement in the October results for both overall (headline) inflation, and for core inflation (which strips out food and energy prices supposedly for reasons that have nothing to do with the economy’s underlying inflation prone-ness).

And both evidently believe that this improvement means that the Federal Reserve will start easing off on the interest rate hikes it’s both approved so far and promised in order to bring price increases down from their recent multi-decade-worsts. In other words, if inflation is moderating, the Fed might not have to slow down economic growth and job creation as much as feared in order to restore price stability.

Here’s why I think both are wrong – or at the very least prematurely optimistic. They’re ignoring that baseline effect. If you look at the data in context, you see that the annual increases in both the headline and core readings for the Consumer Price Index (CPI) are both coming off prices rises that were highs for the previous year, and that heated up considerably between September and October.

Specifically, although the year-on-year rise of headline CPI did slow to its weakest rate (7.76 percent) since January, the previous year’s annual October overall consumer price increase was that year’s fastest (6.24 percent). The new yearly annual CPI increase was indeed cooler than September’s (8.22 percent). But that figure was coming off a 2020-2021 rise of just 5.39 percent.

Core inflation displayed a similar pattern. In October, prices of goods and services excluding food and energy rose by 6.31 percent at an annual rate – down from a September increase of 6.66 percent that was the worst such figure since August, 1982 (7.06 percent). But the previous September, core annual inflation was 4.04 percent. The previous October, it was a considerably higher 4.59 percent.

The best interpretation, as I see it? Businesses still have plenty of pricing power, which will keep inflation dangerously high, because consumers still have plenty of spending power.

Such inflation pessimism (especially if the Fed does ease off its tightening policy) is also supported by the monthly headline CPI numbers. Overall prices climbed sequentially by 0.44 percent in October. That was way off the high for this year (March’s 1.24 percent). But it represented the third straight speed up.

The news was much better for core monthly CPI. The October rise of 0.27 percent was the year’s slowest, and down greatly from September’s 0.58 percent.

But that core performance bears careful watching, too, because energy prices in particular tend to influence consumer prices eventually, since energy is a key cost for virtually every good and service produced in America. In fact, month-to-month, energy prices were up 1.8 percent in October after falling 2.1 percent in September.

In that vein, another clue about future inflation rates is coming next Tuesday, with the release of the new producer price report. That measures what companies charge each other for the purchases needed to turn out whatever they provide to consumers and to each other (if businesses are their final market). And don’t forget: The CPI isn’t the Fed’s favorite gauge of inflation. It looks more closely at the price indices for “Personal Consumption Expenditures,” and these October results come out December 1.

These clues, however, even if taken all together, won’t be all that big for inflation-watchers, as they’ll cover just a single month.  As Fed Chair Jerome Powell stated earlier this month, the central bank is going to need to see “a series of down monthly readings,” and much other evidence, before concluding that inflation is “coming down decisively.”  Although he really was behind the curve is foreseeing how prices would shoot up, waiting for the trends over time to start appearing seems like by far the best inflation-fighting approach now.  And why the markets’ reaction to today’s data seems like what one of Powell’s predecessors called  “irrational exuberance.” 

(What’s Left of) Our Economy: New Official Figures Show Continued Blazing U.S. Inflation

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consumer price index, core inflation, cost of living, Federal Reserve, inflation, PCE, personal consumption expenditures index, Producer Price Index, recession, {What's Left of) Our Economy

Today’s new release covering September makes it two straight lousy official reports on the Federal Reserve’s preferred measure of U.S. inflation – the price index for Personal Consumption Expenditures (PCE). At least as bad: The new figures come on top of lousy September reports on the Consumer Price Index and on price increases at the wholesale level (the Producer Price Index).

The latter, of course, usually feeds future inflation at the consumer/retail level as long as businesses retain pricing power – which is clearly still the case because of all the cash households still have to spend due to humongous stimulus legislation and the Fed’s own historically off-the-charts efforts to juice the economy during the CCP Virus era.

The worst result from today’s PCE report came in the annual core numbers. They leave out food and energy prices, (supposedly because they’re volatile for reasons having little or nothing to do with the economy’s fundamental inflation prone-ness), and rose for the second straight month, from 4.9 percent to 5.1 percent. That’s the fastest increase since March’s 5.2 percent.

The best thing that can be said about the other September numbers is that they didn’t rise above multi-decade highs.

Headline PCE inflation stayed at the 6.2 percent it registered for August. It’s down from June’s peak of seven percent, but still way above the Fed’s target rate of two percent.

On a monthly basis, headline PCE increased by 0.3 percent in September and core PCEn by 0.5 percent. Both matched the August rates, too. The overall PCE advance was much better than its peak of one percent (also hit in June). But as recently as July, headline PCE dipped by 0.1 percent. So that actual deflation looks like a mere blip now.

Core PCE reveals a similar pattern. Month-to-month its high came in June as well, at 0.6 percent. In July, it flat-lined but has since rebounded strongly.

At this point, moreover, the only reasonable forecast for the foreseeable future is more towering inflation – and not just because most consumers’ finances are in very good shape. There are also all the new federal boosts to demand in the form of student loan forgiveness, the annual Social Security cost-of-living increase (justified, of course, by high inflation), and now the prospect that the Federal Reserve will indeed chicken out on the inflation-fighting front for fear of tipping the economy into recession. (For the record, I’m surprised at how far down the interest rate hike road the central bank has gone.)

In other words, consumer spending power looks certain to remain strong, and government could well back off from biting the bullet and taming inflation by choking off growth in order to limit that spending. (Serious efforts to employ the other fundamental inflation-fighting tactic, boosting production and therefore the supply of goods and services to close the gap with demand, appear off the table for now as well.) The only big uncertainty that’s left continues to be how long this party can last.      

(What’s Left of) Our Economy: U.S. Inflation Just Rebounded on the Wholesale Level, Too

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Biden administration, consumer price index, core inflation, CPI, Federal Reserve, food stamps, inflation, interest rates, monetary policy, Obamacare, PPI, Producer Price Index, Social Security, student loans, veterans, wholesale inflation, {What's Left of) Our Economy

After today’s official report on producer price inflation in the United States, it’s hard to see how anyone could still genuinely believe that the worst of the recent, decades-high price increases afflicting Americans is past.

In the first place, both versions of the Producer Price Index (PPI) worsened sequentially in September) for the second straight month. And in the second place, these results are likely to generate acceleration in consumer prices (those September figures come out tomorrow) because these “final demand” producer price (also called wholesale price) numbers tell us what businesses charge for the goods and services they buy to create what they sell to consumers.

It’s true that, at some point, U.S. businesses will lose this pricing power because their customers simply can’t afford to keep buying as much. But continuing strong inflation at all levels by definition makes clear that this development isn’t imminent. (Otherwise, price increases would have cooled much faster.)

Moreover, the Federal Reserve’s tighter monetary policy, which makes credit more expensive, isn’t likely for at least several months to slow economic activity enough to moderate inflation. And the Biden administration keeps putting more money in people’s pockets (e.g., in the form of a – scaled back – student loan forgiveness program, a major expansion of food stamp eligibility and Obamacare benefits, and higher spending on veterans benefits). Further, tomorrow Washington could announce the biggest increase in Social Security payments (which are indexed to inflation) in decades.

Overall producer prices rose sequentially by 0.38 percent in September. The monthly increase was the first since June, but keep in mind that it followed a July drop of 0.41 percent and a smaller August decline of 0.18 percent (hence my claim above of two consecutive months of discouraging results).

As with the consumer price index (CPI), the government also releases “core” producer price figures that strip out food and energy prices supposedly because their volatility has nothing to with the economy’s fundamental vulnerability to inflation. And quickening inflation was apparent here, too, with September’s monthly increase of 0.36 percent following an August rise of 0.25 percent and a July bump up of 0.13 percent.

The headline year-on-year PPI increase looked a little better – but only if you forget the baseline effect, which can produce misleadingly high or low results if the preceding year’s readings (in this case) were abnormal in either direction.

The September annual rise of 8.55 percent represented the third straight month of deceleration, and the lowest such number since July, 2021’s 7.83 percent.

But it’s coming off an annual increase the previous September of 8.82 percent. By contrast, this year’s highest annual PPI increase (March’s 11.67 percent number) came off a yearly rise of only 4.06 percent the previous March. That’s less than half as high. Therefore, it’s entirely reasonable to see plenty of still worrisome producer price momentum in that most recent annual data.

As for core PPI, September actually saw an acceleration in the annual pace – from August’s 5.60 percent to 5.66 percent. And although the latest figure is still the year’s second lowest, it’s coming off a September, 2020-21 increase of 6.17 percent. The highest annual PPI result for this year (March’s 7.11 percent), that increase followed one between the previous March’s of a mere 3.15 percent – roughly only half as high.

Between these new wholesale price results and the rapid consumer prices increases revealed in last month’s official report on the consumer inflation measure preferred by the Fed, the case for peak inflation looks weaker than it has for months. And here’s one more reason for doubting that the cost of living crisis will abate much any time soon:  the unlikelihood, at least as I see it, that the Fed will keep tightening monetary policy much longer and risk being charged with throwing the economy into a recession with a presidential election coming up.

Of course, the central bank is supposed to be immune from political pressures (including public opinion). But of course, nothing in Washington is. I’ve actually been surprised that the Fed has persisted in its hawkish stance this long. But the real test of its convictions is still months away.       

(What’s Left of) Our Economy: So What’s with U.S. Inflation Now?

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baseline effect, Biden, businesses, consumer price index, consumers, core inflation, CPI, energy prices, Federal Reserve, food prices, inflation, PPI, Producer Price Index, {What's Left of) Our Economy

Just my luck! I get invited to an exciting conference in Florida last week, and two days of it took place when the latest U.S. inflation figures, covering retail and wholesale prices for August, came out.

I was able, though, to note in a tweet after perusing them quickly, I couldn’t “do my usual monthly #CPI dive. But when I do, I bet I find that the baseline effect that had somewhat misleadingly boosted 2020-21 y/y #inflation #s is starting conversely to misleadingly dampen 2021-22 annual results somewhat.”

Well, now I’ve had the chance to examine the new Consumer Price and Producer Price Indices (CPI and PPI, respectively), and it turns out I’d have won that bet. And these findings provide ample reason for skepticism that peak inflation is over for Americans.

It may not be likely to spiral up further, as President Biden suggested last night on Sixty Minutes. But the August data indicate that, on an annual basis, just as a good share of the higher increases businesses charged consumers and each other earlier during the current burst of inflation stemmed from statistical quirks that produced artificially hot numbers, the last few months’ year-on-year results are artificially tame because of that statistical quirk working in reverse.

That is, consumer and business prices may stop accelerating, and may even decline slightly from where they are now. But in absolute terms, goods and services will probably remain painfully expensive and keep straining household and company budgets – at least until the Federal Reserve’s inflation-fighting moves or other developments kill enough economic demand (as intended) to destroy most of the pricing power companies presently enjoy.

Sharp-eyed RealityChek regulars will understand that, of course I’m talking about the baseline effect. Specifically, late last year and early this year, much of the  scary-looking multi-decade high yearly price increases could be attributed to the fact that the previous annual inflation numbers were rock-botton low because of the sharp economic downturn and its aftermath created by the CCP Virus’ first wave in the spring of 2020. Because price increases virtually stopped then (and in some months actually fell in absolute terms), the return to the recent norm in year-on-year inflation rates resulted in deceptively high inflation figures.

As chronicled here, e.g., the baseline effect then began fading – signaling that more of the still-worrisome official inflation data coming out of Washington was due to changes in actual economic conditions, and that consequently price increases would have more staying power.

Lately, though, as the second calendar year of high inflation has dragged on, the statistical distortions may be leading to excessive complacency. The reason? What modest dips have been recorded in annual inflation rates are now coming off baseline figures that were already close to historic highs, as opposed to being stuck near zero.

So this tells me that if goods and service providers have been able to raise prices over the past year by, for example, about eight percent on top of the seven percent increases they successfully pushed through the year before, they must be pretty confident that they can keep prices at or near these towering levels until the economy tanks for whatever reason.

And my reading of the numbers bears out this thinking.

Let’s start with the so-called headline CPI figure, which showed an 8.25 percent annual increase in August. That’s the best such performance since the 8.22 percent reported for April. But this latest April year-on-year figure followed a 4.15 percent headline CPI read between the previous April’s. August’s baseline figure was considerably higher – 5.21 percent.

The so-called core CPI read for August wasn’t quite as encouraging, mainly since this measure strips out food and energy prices due to their supposedly unusual volatility. And energy prices in particular are well off their peaks ovewhelmingly because of American drivers’ unwillingness to pay those $5 per gallon gasoline prices that prevailed in late spring into early summer, and because of the major economic slowdowns being seen in China and Western Europe.

Indeed, August’s annual 6.32 percent rise was the highest since March’s 6.44 percent. But the baseline effect means that such inflation was even worse than it looks, for the March annual result followed a core CPI increase of just 1.66 percent between March, 2020 and March, 2021. The August number followed a previous annual surge of 3.96 percent – more than twice as strong.

The “reverse baseline effect” has been even more dramatic for the Producer Price Indices. August’s annual wholesale inflation mark of 8.69 percent was the best for the entire year, and decidedly lower both than July’s 9.78 percent and way weaker than the recent peak of 11.67 percent reported for March.

That torrid March pace, though, followed a 2020-21 increase of 4.06 percent. The new August inflation rate comes on the heels of an 8.58 percent PPI worsening between August, 2020 and August, 2021. Even worse, that 2020-21 percent producer prices inflation rate was a striking example of catch-up. From August, 2019 to August, 2020, wholesale prices fell in absolute terms by 0.17 percent. That can only mean that powerful momentum still lies behind these producer prices.

The same story has played out for core producer prices. This August annual result – 5.61 percent – was also the year’s best. And not only was it much better than the peak number of 7.11 percent in March. It represented the fourth straight decrease.

But that March core PPI result followed a 3.15 percent annual increase in these prices between the previous Marches. The baseline figure for this August’s result was 6.19 percent – as with the headline PPI data, nearly twice as high.

This is why the strongest argument that peak inflation has been hit comes from the month-to-month numbers. For headline CPI, prices edged up sequentially in August by just 0.12 percent. Although that’s a slightly worse performance than July’s 0.02 percent monthly decrease, it’s a veritable nosedive from this year’s highest figure – June’s 1.32 percent.

If you believe, with fall and winter just around the corner and the Ukraine War still disrupting global oil and gas trade and supplies that the energy prices paid by U.S. consumers will keep falling at the August monthly rate of five percent, you’ll be optimistic about core CPI. If you have your doubts…not so much.

The monthly core CPI increases have fluctuated less than the headline, and generally have been lower in absolute terms. But August’s 0.57 percent sequential increase was actually stronger than July’s 0.31 percent, and not much slowing is evident this year in this inflation measure.

The monthly PPI figures look more peak inflation-y – especially since when businesses have to pay higher prices for the goods and services their operations need, they do their darndest to pass these higher costs on to consumers. At the same time, as I’ve noted in posts on tariffs and inflation, the converse can’t be counted on. Businesses generally won’t give consumers a price break even when their own costs decrease unless demand slacks off, too.

All the same, even though energy is mainly responsible, it’s important that in August, headline PPI weakened sequentially for the second straight month – sinking by 0.13 percent. As with core CPI, core PPI rose faster on month in August (0.23 percent) than in July (0.14 percent). But these last two figures were two of the year’s best.

Still, in line with my oft-stated position that data over longer time periods is more reliable than data over shorter time periods, I’m putting more stock in the annual figures – again, until and unless the economy slows significantly or tips into recession.  And they’re making clear that the nation faces a near-term future f historically and troublingly high prices, if not continually soaring prices,    

(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.