So -- the bottom line is total PPI is at uncomfortable levels in and of itself. However, while there is some bleed through to CPI, CPI is still lower, indicating that PPI can run at these levels without causing inflationary concern -- yet. But, these are figures that we have to keep an eye on going forward.Put another way, if we think of PPI as the first set of prices that lead into CPI, then we see that initial prices (the prices paid to manufacturers) are running hot, but there isn't as much bleed through into CPI as there could be. This cushion limits the impact of higher then desired PPI. Now let's turn to CPI, which the BLS recently reported thusly:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.8 percent before seasonal adjustment.Looking at the graphs, we get the following data:
Total CPI is approaching levels that are high by historical standards for the last 25 years (the post Volcher years). Looking back over the last 10-20 years, we see the bulk of the reported levels in the 2%-3% range, whereas the latest YOY percentage change is coming in at 3.8%. This is hotter than we would like. However,
Core is running at 2%. In addition, some of the recent bump can be attributed to CPI being at low levels over the last few years. This tells us commodity price pressures are not bleeding into core prices.
However, let's take a look at two important sub-sets of prices: food and energy.
Food prices are running extremely hot; they are printing near their highest levels of the last 20+ years. Some of this spike is due to the low levels seen over the last two years. But, there have still been some very large price spikes as well. Also note these are levels associated with recession; when food prices have been at these levels in the past, a recession has followed. There are only two other historical data points to reference regarding this, so the evidence is not conclusive (ideally, we'd like to have more data to draw such an important conclusion).
Energy prices are also very high. However, the economy weathered YOY price spikes similar magnitude in the last expansion and did fairly well.
While the ability of middle men to absorb price increases and not pass them on is admirable, the bottom line is total CPI -- especially food prices -- is concerning. At 3.8% YOY it's running at higher than desired levels. In addition, the current trend is for more increases -- obviously not good. The good news is oil prices are lower and food prices (futures) have been moving sideways for the last 9-12 months. But there is ample reason for concern at the point.