The “Producer Price Index” (PPI) is essentially the tracking of wholesale prices at three stages: Origination (commodity), Intermediate (processing), and then Final (to wholesale). Today, the Bureau of Labor and Statistics (BLS) released April price data [Available Here] showing another 11.0% increase year-over-year in Final Demand products at the wholesale level.
Last month when looking at internal economic activity that showed a contraction in consumer purchases of goods, we said pay attention to the service side of the ledger now. Knowing people have stopped buying ‘stuff’, if people are starting to run out of money, they will cut back in the service sector (dining out, etc).
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While the PPI focuses on prices, the PPI data for April shows exactly that service side contraction now taking place. Wholesale inflation in goods is determined heavily by higher costs for raw materials and processing. However, the rate of inflation within the service sector is more connected to what consumers can afford. Modified Table-A, look at the April difference between goods (1.3%) and services (0.0%):
[Ex. The lawn company might pay 50% more for oil and gasoline (goods side), but they may not be able to increase the rate they charge you by 50% to mow the grass (service side).]
The major current production inflation in both goods and services is directly connected to the cost of energy. Energy prices are embedded in every sector of the economy. For “goods” higher electricity, heating/cooling and petroleum costs (packaging, materials, transportation, etc) are unavoidable and passed on to consumers. For “services,” individuals and companies raise their prices to compensate for increases in their own costs. It is a cumulative inflation snowball.
In April the Total PPI of 0.5% was influenced by downward price pressure from the service side. The price of final demand (wholesale) goods increased 1.3%. The price of final demand (wholesale) services was 0.0%. [Note: Wholesale trade services dropped by 0.5%]
Normally I would clean up TABLE-A “intermediate demand goods both processed and unprocessed.” However, in this month the entire field of data tells a very compelling story.
Note that Intermediate Demand Processed foodstuff prices grew at 2.9% in April. Annualized that is a 34.8% increase in price. This is the scale of future price increases we are likely to see at the supermarket. That 35% rate of inflation for center store products is exactly what CTH predicted for the third wave of price increases.
The Intermediate Demand Unprocessed foodstuffs, increased in price by 2.5% in April, those foodstuffs are entering the wholesale market at a 30.0% annualized rate of inflation vs last year.
As an analogy, think of the difference between processed foodstuffs (center store and dairy) and unprocessed foodstuffs (fresh produce, meats) as you would normally think about them in the supermarket. As you can see the processed product rate of inflation (34.8%) is higher than the non-processed (30.0%). The difference is the additional costs associated with processing as a major result of energy prices.
What the producer price index at the wholesale level is telling us, is that inflation on consumable goods is still not yet at the apex. For durable goods the prices are less volatile, but price pressures are still in the upward direction. The price of gasoline and transportation overall will be a big factor in current prices of highly consumable goods. We cannot and will not start to climb out of the inflation spiral on goods until we see oil, gas and energy prices stabilize first.
On the service side, inflation is going to be determined by how long businesses and operators can continue operations without raising prices. How long can a restaurant pay 30-to-35% more for their supplies, before those price increases need to show up on the menu?
Joe Biden sucks.
(WASHINGTON) – […] The producer price data captures inflation at an earlier stage of production and can sometimes signal where consumer prices are headed. It also feeds into the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures price index.
Thursday’s figures came just a day after the government released consumer price data for April, which showed that inflation leapt 8.3% last month from a year ago. That increase is down slightly from the four-decade high in March of 8.5%. On a monthly basis, inflation rose 0.3% in April from March, the smallest increase in eight months.
Still, there were plenty of signs in the consumer price report that inflation will remain stubbornly high, likely for the rest of this year and into 2023. Rents rose faster as many apartment buildings have lifted monthly payments for new tenants. Prices for airline tickets jumped by the most on records dating to 1963. And food prices continued to rise sharply.
The Federal Reserve has stepped up its fight against rampant price increases, lifting its benchmark short-term interest rate by a half-point last week to a range of 0.75% and 1%. That increase is double its usual quarter-point hike. (read more)