Thursday, July 14, 2011

Inflation still alive and well at the producer level

June Producer Price Inflation came in a bit stronger than expected, despite the biggest decline in energy prices in two years. Although the headline PPI fell by 0.4% during the month, the more important number is the core PPI, which rose by 0.3%, vs. an expected rise of 0.2%. On a six-month annualized basis, the headline number is now 8.1%, and the core number is 3.7%. The core PPI hasn't risen this fast since April 1991.

That core prices are rising is a reflection of the strong gains in commodity prices that are making their way through the production pipeline. It is also a reflection of the fact that monetary policy is quite accommodative, since it is not trying to fight higher energy prices. If policy were tight, then higher energy prices would have forced declines in non-energy prices, but that is not happening. Since producer prices are more sensitive to commodities than the CPI, the PPI is thus like the canary in the coal mine, predicting higher inflation on the way in the CPI.

It's also important to note that rising inflation is showing up at the producer level, despite the substantial amount of economic "slack" that presumably exists in the U.S. economy. This casts doubt on the widely-held belief, which the Fed shares, that today's large output gap will be an important restraining force on inflation.


Public Library said...

The gyrations over the last decade or so are enough to make you nauseated...

McKibbinUSA said...

What is needed and required at this point is a QEIII of about $3-5 trillion over the next three years -- moreover, the money should be distributed directly to citizens through the elimination of personal income taxes for those earning less than $250,000 annually -- the Bush tax cuts for the wealthy should made permanent as well -- the net result will be a devaluation of the US dollar and national debt through inflation to its true value, which is probably less than half its faced value today -- recognizing the true value of the dollar is a necessary step toward healing the US economy -- however, the devaluation of the US dollar is imminent and its true value needs to be reflected in the markets sooner than later -- QEIII is needed because private demand by consumers (which does not include government employees and retirees) cannot be restored until ordinary private sector workers have some money in their pockets to buy cars, household appliances, furnishings, and so forth -- the money being held by banks and the wealthy will never find its way back into the hands of consumers at this point -- yes, a devaluation of the dollar will hurt savers, but their savings are regretfully worth pennies on the dollar at this point irregardless -- investors with dividend paying stocks and rent paying real estate will see their asset values rise dramatically in an inflationary environment -- those living on public salaries or pensions will see their lifestyles drop dramatically, which is simply their bad luck -- these are the steps that are needed and will happen regardless of what the public wants, thinks, or desires at this point -- for those who disagree with me, watch and learn -- everyone should get ready for QEIII, inflation, and dramatic changes in the US economic landscape in the near term...

Benjamin Cole said...

Jeez, if I follow what Scott is saying, we have to fight inflation now--before we have generated any employment or real economic growth.

This strikes me as the Japan solution. Start worrying about inflation when it gets over 2 percent (despite the difficulty of measuring inflation at all at such low levels).

Do doubt, if the Fed fails to stimulate, we will have deflation soon. Is that a goal? Why/

What is so bad about some growth and mild inflation, a situation that prevailed all through the 1980s and 1990s, and even into the 2000s?

When Reagan faced 4-6 percent inflation, the right-wing urged that Volcker be given the boot, and that we need a more stimulate Fed.

I have to wonder what are the motives behind the current obsession with ultra-low inflation rates. The core PPI is at 2 percent. That does not make me shiver in my boots.

Unknown said...

Isn't this relatively high difference between PPI and CPI pushing companies margins down?

Benjamin Cole said...

Family Man:

At least on the S&P, firms are making record profits. Margins must be okay, and I suspect they would widen if we had a robust recovery.

Unit labor costs have been falling, and commercial rents of all kinds are very soft. I see no scenario in which inflation is serious when 70 percent of business costs are soft to down.

We have reached an era of anti-inflation fetishes.

Even a few years of five percent inflation would not worry me--and would help this country deleverage.

Benjamin Cole said...

BTW, there are a lot of ways to look at the PPI data.

For "intermediate goods," the change in price over the last 12 months of 0 percent. That's zero.

For the month of June, all finished goods fell by 0.4 percent.

This is inflation? This has people quivering in the boots?