Wednesday, January 23, 2013

Where's the Inflation?

Last week, the BLS released both the PPI and CPI.  Both showed tame numbers.  However, that leads to a question: despite all the money printing by the Federal Reserve, there is literally no inflation in either the producer or consumer numbers.  Let's take a look at the data.

Above is a five year chart of the the year over year percentage change in producer prices.  Notice that coming out of the recession we see large increases (which is actually pretty standard).  However, over the last 8 months, we see minuscule increases, as better shown in the following chart:

For four of the last twelve months we see a decrease in PPI.  And for the last 9 months the increases are tiny by historical comparison.

The two charts above show the most volatile components of the PPI.  Energy prices (top chart) have been contained for the last twelve months, actually printing solid decreases for most of the readings.  The real inflation at the producer level is in food prices (bottom chart) which are showing a decent increase.  However, these are not bleeding through to the composite readings.

Turning to CPI, we see the following graphs:

The top chart shows the last 10 years' year over year data.  Notice that for most of the last 12 months, the readings have been right below the 2% level.  The red line shows that this is a very low reading when compared to the last expansion.  The lower chart shows the data in a 5 year time frame.  From 2011-2012 we see increases rising to nearly 4%, but that number has clearly decreased since then.  Over the last 10-12 months, we see very tame readings for this number.

Finally, we see a graph that shows the relationship between the year over year increase in PPI and CPI for the entire duration of the great moderation (1980-2007).  We can break this chart into two periods.  The first occurs between 1981 and the late 1990s.  During this time, PPI (the red line) was very tame and spent a fair amount of time printing negative numbers.  The second period (late 1990s-now) shows PPI numbers that are far more volatile.  However, during both of these periods, CPI (the blue line) was remarkably tame.

This chart shows that PPI's volatility so far has not led to a massive spike in CPI.  The reason is producers appear to be absorbing the cost increase.  Considering the current state of very weak demand, it's doubtful we'll see producers attempt to pass on any increase they see in prices.