- by New Deal democrat
Normally I don’t pay too much attention to producer prices, but occasionally they are very important - and today is one of those days.
Here’s why. In the past, as shown in this graph going back over 50 years:
when producer prices outstrip consumer prices, that means producers aren’t able to pass on the full amount of any price increases to consumers.
Put another way, corporate profits decline. Below is a graph of the last 10+ years, with the YoY changes in final demand producer prices and consumer prices averaged quarterly, vs. corporate profits (/2 for scale):
With a lag of several quarters, once producer prices outstrip consumer prices, the YoY gains in corporate profits decelerate and even outright decline. This shows up as weaker inputs in producer prices, and the cycle restarts.
Final demand producer price gains have been approximately equal to consumer price gains since last summer. If producer prices now spike even higher, we should expect that to show up in corporate profits within another quarter or two, and possibly even this quarter.
And when corporate profits turn down, they think about scaling back hiring, and even layoff off workers.
This morning suggested that such a spike in producer costs, probably engendered mainly by tariffs, but also by the weakened US$, has begun.
Raw commodity prices (dark blue in the graph below) increased 0.7% in July, while final demand producer prices (light blue) increased 0.9%, vs. 0.3% for consumer prices (red):
This is the second month in a row of such outsized gains, and the fourth time in the last seven months.
Meaning, on a YoY% basis, commodity prices are up 2.0%, while final demand prices are up 3.3%, vs. 2.7% for consumer prices:
And the relative surge in producer prices is showing up in both goods (red in the graph below) vs. services (blue):
The July increase in final goods prices was the highest since February of last year except for this past January, while that for services was the highest going all the way back to March 2022.
On a YoY basis, except for January the increase in goods prices is the highest in over two years, and services appear to be trending somewhat higher as well:
In summary, unless something changes in the tariff situation (unlikely), this is the beginning of a profit squeeze, and will likely negatively impact “real” consumer spending as well.
