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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.