Thursday, September 14, 2023

The economic tailwind from falling commodity prices has likely ended


 - by New Deal democrat

[Note: I’ll post on the August retail sales report later today.]

Two days ago in my PPI and CPI overview, I wrote “I am most interested in whether the producer price report tells us that the big decline in commodity prices is over. There have only been two increases in commodity prices in the past 12 months [ ] I suspect we’ll get #3 [on Thursday]. If producer prices have stopped declining, then the tailwind I have described above has ebbed, and maybe ended.”

As anticipated, that is just what happened. Commodity prices (blue below) rose 1.5% in August. July was also revised slightly so that it rounds to unchanged rather than a decline. The PPI for finished goods (red) also rose 2.1%:

PPI for finished goods is now up YoY by 2.2%, and is only -1.2% below its June 2022 peak:

And it isn’t only energy which has contributed to the end of the decline. Excluding energy, both intermediate and final goods production costs rose slightly:

My strong suspicion has been that the tailwind of declining commodity prices, typified by the big decline in gas prices in late 2022 is what allowed the US economy to grow so well so far this year, blunting the effects of major Fed interest rate hikes. If this tailwind is indeed over, only the accumulating headwinds will remain going forward.