- by New Deal democrat
I usually do not pay much attention to producer vs. consumer prices. Partly that is because in the past few decades, the PPI has tended to be coincident with the CPI rather than leading it, and partly because so long as the YoY PPI is less than CPI, producers do not feel under pressure to make cost (i.e., payroll) cuts. Unfortunately, that means that since the start of the Iran war I’ve had to pay more attention to the PPI release.
Let’s start with the raw numbers. Producer prices for final demand (red) decreased -0.1% in July, while raw commodity prices (including oil)(gold) declined -0.8%. This compares with consumer inflation (blue), which increased 0.1%:
On a YoY basis, PPI final demand was up 4.7%, and 8.3% for raw commodities, vs. 3.4% for consumer prices:
Significantly, the PPI increase for final demand services, which had been 4.6% or higher YoY for the past few months, decelerated to 3.9% in July - which unfortunately is still higher than any such reading aside from the immediately inflationary post pandemic period, and briefly in the summer of 2024:
Of more concern, as per my lede above, is that the YoY measure of final demand producer prices remained higher than the that for consumer prices. And although it hasn’t been a uniform rule, as this historical graph shows, when the YoY% increase in PPI exceeds CPI, more often than not that spells trouble:
This indicates that the underlying inflationary pulse has continued to go well beyond energy related prices. And, just like last month, it also confirms what we have seen for a number of months now in the regional Fed indexes: widespread price increases in inputs, which are only incompletely being based on to buyers downstream. To summarize, the regional Fed indexes for the past few months have indicated rampant input price hikes, with much - but not nearly complete - pass-throughs to consumers.
So my conclusion this month is the same as it was last month: “If producers stay squeezed, they are going to begin to make cost cuts where they can.” Which may include a freeze in new hiring, a cut in hours, or possibly even worse. In other words, this inflationary expansion is likely to either stop being inflationary, or stop being an expansion, sometime in the not too distant future.
