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

Tags

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.   

Advertisement

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

Tags

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

Tags

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

Tags

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.

Tags

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: U.S. Inflation Just Rebounded on the Wholesale Level, Too

Tags

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: Are High Prices Starting to Cure Wholesale Inflation, Too?

Tags

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.

(What’s Left of) Our Economy: New U.S. Wholesale Price Results Belie Biden’s Inflation Optimism

Tags

Biden, consumer price index, core inflation, CPI, credit, energy prices, Federal Reserve, food prices, inflation, monetary policy, PPI, Producer Price Index, recession, retail inflation, wholesale inflation, {What's Left of) Our Economy

Yesterday, I wrote that we’ll know if President Biden’s optimism about the direction of multi-decade high consumer inflation is well founded when today’s data about producer prices come in. Now they’ve been released, and Mr. Biden or one of his aides might want to consider walking that one back. Because the new producer price index results (PPI) were as bad as those consumer price index (CPI) figures the President tried to explain away.

According to Mr. Biden, yesterday’s worrisome CPI release (taking the story up through June) is “out-of-date.” The reason? Oil prices, which have done so much to spur the recent “headline” (economy-wide) inflation, have come down this month. He added that “core inflation” (which strips out food and energy prices supposedly because they’re volatile for reasons having little to do with the economy’s underlying vulnerability to inflation) was subsiding, too.

As I noted, the PPI results would matter so crucially because they measure what businesses pay for the goods and services they need to create the output they try to sell to their customers. And if customer demand is strong enough (which yesterday’s numbers made clear is the case), these companies can and will pass along any higher prices they pay. So as long as producer price (or wholesale) inflation is bad, it’s a safe bet that succeeding consumer price (or retail) inflation will follow suit for a while.

And that’s exactly the message being sent by the new PPI report – especially when you take into account the baseline effect (which you always should).

The headline annual June PPI increase of 11.19 percent was the highest since March’s 11.57 percent. And although it does include those food and energy prices, since energy in particular is a major input for so many of the U.S. businesses that turn out so much of what consumers buy, it’s likely that these higher costs will wind up keeping both the headline and the core CPI numbers troublingly high next month – and possibly push them higher.

June’s core wholesale inflation read looks considerably better. Indeed, at 6.33 percent, it was the lowest since last October’s 6.26 percent. But here’s where the baseline effect comes in. The baseline figure for the October, 2021 annual PPI increase was the October, 2019-20 rise of 0.90 percent. In othe words, back then, wholesale inflation was super-low, thanks mainly to continuing worries about the course of the CCP Virus and its impact on the overall economy and therefore on consume spending.

And as known by RealityChek regulars, because that baseline annual increase was so unusually low, the subsequent return to some version of economic normality was bound to produce an unusually high annual increase the following year.

But check out the baseline for last month: It was 5.84 percent – more than six times higher than that of October, 2020. Therefore, a 6.33 percent yearly wholesale inflation increase coming off that baseline is powerful evidence that major producer and consumer price increases are going to remain facts of American economic life for the time being – specifically, as long as demand holds up.

Sooner or later, President Biden will be right. Unfortunately, as I’ve written, that’s sure to be because either the Federal Reserve will tighten credit conditions so much that demand weakens enough to produce a recession, because ever higher prices weaken demand substantially on their own, or some combination of the two. If that happens while he’s still President, somehow I don’t think Mr. Biden will be saying “I told you so.”

(What’s Left of) Our Economy: The Latest Sign That Inflation is Here to Stay

Tags

baseline effect, consumer price index, cost of living, CPI, Federal Reserve, inflation, monetary policy, PPI, Producer Price Index, recession, supply chains, wholesale inflation, wholesale prices, {What's Left of) Our Economy

If you follow the news about the U.S. economy, you know by now that the federal government’s Producer Price Index (PPI – its measure of wholesale price inflation), rose at a slightly slower annual rate in April (11.03 percent) than in March (11.18 percent).

Ditto for the core PPI, which omits not only food and energy but trade services – since supposedly they’re volatile for reasons having nothing to do with the economy’s fundamental vulnerability to out-of-the-ordinary price changes (decreases as well as increases).

Both PPIs measure how much businesses charge each other for the goods and services they turn into final products and sell to households and individuals. That’s why they’re naturally seen as precursors of future consumer inflation rates (measured by the Consumer Price Index, or CPI).

After all, as long as the economy’s overall demand levels (reflecting overall growth levels) remain healthy, these businesses mostly will be able to pass these cost increases on to customers and actually will. Higher consumer inflation follows. So anything like the opposite is happening, and if producer prices are easing at all (even from historic highs), that’s got to be encouraging news on the consumer and overall inflation fronts.

But did the April yearly rate of increase really slow down? Maybe not. That’s because it’s a preliminary reading and, as shown by the left-hand column in the table below, since last September, every revision of that first estimate went up.

Jan 2021: 1.60 percent now 1.59                                1.97 percent

Feb 2021: 2.96 percent now 2.95                               1.11 percent

March 2021: 4.15 percent now 4.06                           0.34 percent

April 2021: 6.51 percent now 6.43                  -1.52 percent now -1.44

May 2021: 6.99 percent now 6.91                   -1.10 percent now -1.01

June 2021: 7.56 percent now 7.49                   -0.68 percent now -0.59

July 2021: 7.96 percent now 7.83                    -0.25 percent now -0.17

Aug 2021: 8.65 percent now 8.58                    -0.25 percent now -0.17

Sept 2021: 8.78 percent now 8.82                             0.34 percent

Oct 2021:  8.87 percent now 8.90                             0.59 percent

Nov 2021: 9.88 percent now 9.94                     0.85 percent now 0.76

Dec 2021: 9.99 percent now 10.58                   0.84 percent now 0.76

Jan 2022: 10.08 percent now 10.17                  1.60 percent now 1.59

Feb 2022: 10.27 percent now 10.51                 2.96 percent now 2.95

March 2022: 11.18 percent now 11.54             4.15 percent now 4.06

April, 2022: 11.03 percent                                       6.43 percent

Sure, the April revision could be a downgrade – like those between January and August, 2021. But the odds of an upgrade look pretty good.

Moreover, the right-hand column in the table shows that the baseline effect, which was cause for some optimism that inflation might peak before too long, is more over than ever.

As known by RealityChek regulars, the unusually high and robustly rising annual CPI and PPI figures for last year stemmed largely from the change they represented from unusually low inflation rates the year before – which were driven down by the arrival of the CCP Virus and the sharp recession it induced by prompting on-and-off lockdowns of huge chunks of the economy, and major behavioral caution by businesses and individuals alike.

What that right-hand column shows is that these effects – even with the slightly better revisions displayed above – were profound enough to result in actual PPI annual decreases from April, 2019-2020 through August, 2019-2020. (The right-hand column also brings the story up to 2020-2021 for January through April – the baseline comparison year for the first four data months of 2021-2022.)

That is to say, the table reveals that the economy’s recovery in 2021 from virus-ridden and downturn-y 2020 amounted to a great catching up process that largely explains the bloated PPI figures. (The other major factor was supply chain disruption resulting from the stop-and-start nature of some of the virus waves and lockdowns, and therefore of the recovery itself.)

But the above table also shows that the baseline effect began fading significantly this past February. That month, the annual PPI rise of 10.27 percent came off a February, 2020-2021 increase of 2.95 percent. The similar January annual increase of 10.08 percent, by contrast, came off a 2020-2021 rise of a much lower 1.59 percent.

And just look at April! That 11.03 percent annual PPI jump has followed a 6.43 percent increase between the previous Aprils.

Moreover, the same kind of trend (at lower absolute levels) is evident from the core PPI data, as shown below. Again, the left-hand column displays the annual increases by month starting in January, 2021. The right-hand column shows the annual changes by month for the year before – the baseline. The only possible significant difference is that I haven’t tracked the revision record for this core PPI series, so I don’t know if the latest April result is likely to be upgraded or downgraded, or unrevised.

Jan 2021: 1.79 percent                                                    1.64 percent

Feb 2021: 2.33 percent                                                   1.36 percent

March 2021: 3.15 percent                                               1.00 percent

April 2021: 4.81 percent                                                -0.09 percent

May 2021: 5.25 percent                                                 -0.18 percent

June 2021: 5.60 percent                                                  0.09 percent

July 2021: 6.01 percent                                                   0.27 percent

Aug 2021: 6.19 percent                                                   0.36 percent

Sept 2021: 6.14 percent                                                  0.72 percent

Oct 2021: 6.26 percent                                                    0.90 percent

Nov 2021: 7.04 percent                                                   0.99 percent

Dec 2021: 7.18 percent                                                    1.17 percent

Jan 2022: 6.91 percent                                                     1.79 percent

Feb 2022: 6.76 percent                                                    2.33 percent

March 2022: 7.10 percent                                               3.15 percent

April, 2022: 6.92 percent                                                4.81 percent

The big takeaway here: Even more than yesterday’s April Consumer Price Index report, today’s release on the Producer Price Index is saying that alarmingly high inflation is here to stay for Americans for the forseeable future. It’s possible that the Federal Reserve, the U.S. government agency mainly responsible for handling inflation, can tighten monetary policy (to reduce that aforementioned consumer demand and in turn growth) skillfully enough to engineer a “soft landing” for the economy – i.e., bring price increases back to much less damaging levels while avoiding a recession. But keep in mind that the next time the central bank achieves this goal starting from inflation rates this hot will be the first.

(What’s Left of) Our Economy: A New Sign That Inflation Will Long Stay Lofty

Tags

consumer inflation, consumer price index, cost of living, CPI, Federal Reserve, inflation, Labor Department, monetary policy, PPI, Producer Price Index, recession, wholesale inflation, {What's Left of) Our Economy

Yesterday’s RealityChek post showed that the baseline effect was no longer a prime driving force behind the historically high consumer inflation rates with which Americans have struggled. That is, the new Labor Department data for the Consumer Price Index (CPI) revealed that unlike its monthly predecessors, the March annual inflation rate wasn’t so strong largely because prices were catching up from having risen so weakly the year before. Instead, because March, 2020-21 CPI was already getting pretty warm – because the U.S. economy had continued recovering (unevenly) from the deep spring, 2020 downturn – the March, 2021-22 inflation result made clear that worrisome price increases had acquired a momentum of their own.

This morning came both another sign that the baseline excuse for high inflation has run its course, and that rapid price increases could well continue for many more months – the Labor Department’s March inflation report for wholesale prices. As opposed to the CPI, which measures what business charge consumers, the so-called Producer Price Index (PPI) gauges what businesses themselves pay for the goods and services they need in order to turn out whatever they sell to individuals and households.

And because the new PPI makes clear that the baseline excuse can no longer be used for such wholesale inflation either, it augurs more torrid consumer price hikes, too – since businesses naturally try to pass on their higher costs to their final customers, and often succeed. Moreover, if you look at the annual inflation increases for recent months, you see that the baseline effect for the PPI ended in February.

The table below presents in the left column the annual PPI increases for each month from January, 2021 through this March, and in the right column, the same numbers for the previous year 2019-2020. As with the Consumer Price Index, the baseline year for the 2021-22 results is 2020-21.

Jan 2021:         1.60 percent            1.97 percent

Feb 2021:        2.96 percent            1.11 percent

March 2021:   4.15 percent            0.34 percent

April 2021:     6.51 percent           -1.52 percent

May 2021:      6.99 percent           -1.10 percent

June 2021:      7.56 percent            -0.68 percent

July 2021:       7.96 percent            -0.25 percent

Aug 2021:       8.65 percent            -0.25 percent

Sept 2021:       8.78 percent             0.34 percent

Oct 2021:        8.87 percent             0.59 percent

Nov 2021:       9.88 percent             0.85 percent

Dec 2021:       9.99 percent             0.84 percent

Jan 2022:      10.08 percent             1.60 percent

Feb 2022:     10.27 percent             2.96 percent

March 2022: 11.18 percent             4.15 percent

As the table indicates, the baseline effect for producer prices began earlier than that for consumer prices, was more dramatic, and lasted longer. Between January and August, 2020, such inflation plummeted from 1.97 percent to -0.25 percent. And yes, you read that last number right. Inflation became outright deflation, and producer prices actually fell on year for five straight months. The last time anything close to this happened was “never” (though, to be fair, the data for this measure of PPI, which is called final demand for both goods and servies, only go back to 2009).

So this dramatic descent into deflation deserves much of the blame for the surge in annual wholesale price inflation between January and August, 2021 – from 1.60 percent to 8.95 percent.

Moreover, 2019-20 annual PPI increases stayed below one percent through December. In January, 2021, the annual rate nearly doubled, to 1.60 percent – signaling that the baseline effect was ending. And its final (for now) demise came the following month, when it jumped to 2.96 percent. Yet during February, 2022, yearly wholesale inflation soared past ten percent. So these price increases obviously entailed much more than a return to normal from unusually low 2020-21 inflation (including those falling prices for nearly half the year). And the more so for this March, since its baseline comparison figure was a whopping 4.15 percent.

These PPI trends and the prolonged high consumer inflation they portend only sharpen the dilemma faced by the Federal Reserve – the only part of the federal government able to act relatively quickly to bring price increases under control. If it tightens monetary policy too dramatically, it could slow economic growth equally dramatically and even bring on a recession. If the central bank is too hesitant, it could still slow growth but leave inflation unacceptably high – a condition called “stagflation.” 

That is, there’s a real prospect that the economy could enter a state it last experienced during the era of disco, streaking, and shag haircuts. But as those of us who lived through it know, economically speaking, this “Seventies Show” was no comedy.