Thursday, December 15, 2011

PPI update

The November PPI was in line with expectations, and didn't show anything unusual. As the chart above shows, the pace of headline PPI inflation has moderated a bit—it's up at only a 3% annualized pace over the past three months—but core PPI inflation has picked up a bit.

With this chart of the actual producer price index, I'm trying to show the bigger picture. The y-axis is plotted on a logarithmic scale so that rates of growth become easier to appreciate. Note the huge 9% annualized growth in the 1970s, followed by the 1.7% annualized growth in the 1980s and 1990s; that's a dramatic statement about just how inflationary monetary policy was in the 1970s and how well Volcker and Greenspan were able to arrest that inflation. In the past 8 years, however, the pace has picked up again, with inflation posting a 3.7% annualized growth rate, double the rate of the preceding two decades. Inflation is far from being a menace, but it has definitely picked up. The Bernanke Fed can not claim to have done a very good job delivering price stability.

The chart above shows the same pattern, only it focuses on intermediate goods, and uses a 10-yr rolling annualized return. Inflation has clearly picked up in the past 8 years, and I note that this same measure is up 15% over the past year. Moving further up the production pipeline, the PPI crude materials measure of inflation has risen at a breathtaking 9.6% annualized pace over the past 10 years, which translates into a 150% increase in prices. From this I conclude that it's premature to view the moderation of the overall PPI in recent months as a precursor to a more moderate inflation regime.


William said...

Thank you, Scott, for the informative posts. I badly needed some better news!

Maybe a part of the psychology of markets recently is a kind of a "flash back" reaction to the PANIC of 2008 when everything was in free-fall. Think of the markets over-reaction to Dubai's financial problems in February 2010 for example.

And, I feel, the markets' reaction to the debts of Italy and Spain this year has been overdone. I read last month that Italy in the past 100 years has never defaulted on its debt except after WW II. Apparently it's finances were about this bad in the early 1990s and Italy worked its way out of trouble.

There was an article today in Bloomberg that hedge funds are having one of their worst years ever - tremendous difficulty managing the persistent high volatility.

Benjamin Cole said...

Inflation is probably lower than it should be for real solid economic growth.

The United States economy flourished from 1982 to 2007—industrial production, for example, doubled, while per capita rose by more than one-third—while inflation almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct. It is irrefutably the historical record. If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic?

Mild inflation performs many services, as unsticking sticky wages, and lubricating real estate markets, and saving banks on perhaps poorly underwritten property loans. It even helps develerage the nation.

Donny Baseball said...

I don't think anyone is saying that 2%+ inflation is dangerous or catastrophic. Rather that the Fed's view (and clearly the bond market's view) that deflation is the big concern or that inflation is well contained is inaccurate and thus their current policy stance is inappropriate. The Fed sees no inflation and thus pursues policies that others feel are inflationary and that could pose unacceptable inflationary risk if the Fed doesn't not see the problem or the connection to its policy.

Also, I think SG's thesis for treasury investors is that the market is missing incipient inflation and thus overvaluing bonds. While 3-4% CPI inflation may not be so terrible for the economy broadly, it will be terrible for your bond portfolio.

Unknown said...

The OFT has a statutory duty to implement, enforce and monitor the PPI Order and alleged breaches of any part of the PPI Order should be reported to the OFT. PPI help