The latest Producer Price Index for Finished Goods is out, and its screaming hot: It advanced 1.2% in July (seasonally adjusted). 1.2% headline and 0.7% core vs consensus estimates of 0.6% and 0.2%.
This follows a 1.8% jump in June and a 1.4% rise in May. The earlier stages of processing were even hotter. Prices received by manufacturers of intermediate goods moved up 2.7% in July versus 2.1-% in the prior month, while prices for crude materials climbed 4.2% after a 3.7% in June.
Year-over-year gains were 9.8% headline — the highest reading since 1981, while the 3.5% core (why do we still mention this?) was the most since ’91. I cannot figure out why there was a big jump in car and truck prices.
Bottom line: These were scorching hot price increases. And, as Michael Donnelly astutely notes, PPI did not adopt the whacky ideas (hedonics, substitutions, weightings, OER) that the CPI did adopted over the years — especially, the Boskin Commission’s junk recomendations. That’s largely because PPI is not as politically important, nor does it move any government payouts.
So we can fairly compare the current PPI of today — 9.8% — very easily with the 10% PPI back in 1981. The two are actually very comparable.
Note that in theory, headline PPI number should cool in coming months due to the big drop in commodity prices. However the core rate won’t drop as quickly, as many price hikes have been put in place over the past 6 months, and are working their way through the supply chain.
Let’s look at a few related charts:
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chart via Jake at EconompicData
Lastly, a comparison of 4 PPIs: Germany also announced that wholesale prices for last month were a
higher than forecast at 8.9%. One look at the chart of relative PPI
changes for these two countries, as well as for the U.K. and China,
reveals a recent pattern that some might find disconcerting.
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PPI: US, Germany, U.K. and China
Chart via Mike Panzner
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Source:
Producer Price Indexes — July 2008
BLS, AUGUST 19, 2008
Bureau of Labor Statistics, U.S. Department of Labor
http://www.bls.gov/news.release/ppi.nr0.htm
Wouldn’t auto prices rise on the cost of transporting them across the country from port/production facility to dealer/enduser? Of course, lower demand should cause lower prices, so one might expect those two effects to balance out…
I’m at a loss on that one as well.
A very interesting inflation-deflation battle is forming up. There are arguments for both sides.
So long as real interest rates are negative, we’ll have inflation, i.e., too much money chasing too few goods and services. Borrowers are effectively being paid to borrow money, which was also the case in the 2001-2005/6 run-up to our little financial system/housing market “troubles”.
The only thing saving the dollar right now (and thereby causing decreases in commodity prices) is that as bad as is the US oversupply of money, the rest of the world has more, particularly the countries that peg their currencies to the dollar. Also, the Euro, et.al., doesn’t get as much liquidity premium as the US Dollar, that shakily remains the world’s reserve currency.
“It’s a healthy pullback to a higher low”
until its not healthy anymore.
I think we will see deflation in things people don’t really need (like Mcmansions and hummers) and inflation in the the things they do (like oil and food).
So far so good.
“some might not find disconcerting”. Remove the double negative?
after the biggest giveaways — stimulus, intervention — ever by FRB to protect the GOP’s chances this fall, just how fast and hard will they try to regain their lost credibility? i dont think they’ll raise rates til July, no matter who wins, but it will be ugly
re: Auto prices…
perhaps also no more hedonics (safety features, etc.) to squeeze out lower prices.
When you have you’re standard run-of-the-mill family sedan with traction control, ABS, side airbags, etc. there’s isn’t any room to fudge numbers.
Will there be demand destruction in food sales?
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Rising food costs turn US city folk into do-it-yourself farmers:
“Mr George Ball, chairman of W. Atlee Burpee, the country’s largest seed company, said he has seen a 30 to 40 per cent increase in vegetable seed sales this year.
‘I think the thing that tipped the scale was the fuel and food costs. This is a big deal for middle-class people.’
http://newpaper.asia1.com.sg/news/story/0,4136,173677,00.html
Sales of veg seed soaring
http://www.northantset.co.uk/news/Sales-of-veg-seed-soaring.4312891.jp
Americans fed up with high produce costs turn to planting gardens
http://seattletimes.nwsource.com/html/nationworld/2008089990_garden04.html
How in the face of “Year-over-year gains were 9.8% headline — the highest reading since 1981” is gold and silver not reacting? (Moreover, I believe actual inflation to be well over 12% when measured by the pre-1990 methods and not cooked by the current administration)
If anything, I anticipate that the FED has no choice but to “lower” rates in the coming meetings to try to stimulate growth. In the face of the greatest growth of money supply in the history of the nation and a free fall in housing to depths that will go beyond those of the Great Depression, I am mystified that people have been shaken off of the Precious Metals as a hedge by blatant manipulation of the USD.
We are witnessing the demise of the USD as the world reserve currency and Russia and China will only seek to accelerate the process.
Interested in your views.
MW
sorry, meant January
With the highest PPI number 9.8% in 27 years, I think the Fed is going to have to throw in the towel and start raising rates. (my guess is starting in 2009)
I think it’s Volker all over again, inflation is out of control and the Fed will have to forceably break the economy to wring out inflation.
This recession will be as bad as the 1980-82 period, I am sorry to write it.
My recollection is that the PPI did not adopt as many of the nutty ideas that the CPI did adopt. (PPI is not as politically important, nor does it move any govt payouts)
So I think the PPI 9.8% is pretty comparable to the 10% PPI back in 1981
If anyone knows different, please let me know.
Re: Cars
I’m thinking that those who would have bought a used car went for the new and most fuel efficient ones. That might be the cause of the bump. Also, aren’t the hybrids more expensive than their equivalent counterparts? Maybe more switched to hybrids with their cyclical car renewal
I also thought of the hedonics angle that just me came up with above and I wouldn’t rule that out either
Just a note:
1) The core, just as you mentioned, is important because it gives us a sense of what is happening outside of commodities which are not only volatile but observable on a day to day basis.
2) Doesn’t persistent Eurozone inflation undercut the the notion that this episode is Fed driven. If anything US Fed policy should be calming European inflation by bolstering the Euro.
Cars: Probably mix. That is, the market for more expensive cars where discounts are less prevalent is holding up better than the mass market while demand for small sedans is such they are not having to give big price breaks while the SUV and truck markets are in the tank and not therefore contributing their traditional price cutting contribution to the auto inflation numbers.
More stuning than the 9.8% yr/yr number is the acceleration we have been seeing. Do the math and over the last three months headline PPI is up 19.1%. That is downright Peruvian! Combine that with Auto sales down hard, housing starts continuing to plunge (which given the inventory overhang is probably a good thing) and weekly claims consistently well over 400k, we have classic stagflation. Or, to put it another way, in the inflation/deflation debate the answer is both. Inflation in goods and services, deflation in assets. Hope everyone likes disco, cuz the 70’s are back, baby.
Michael: It appears that the BLS is using hedonic adjustments for computer pricing in the PPI calculation.
Details here: http://www.bls.gov/ppi/ppicomqa.htm
Economists and others react to the Producer Price Index’s highest annual increase in 27 years:
Lower crude oil prices should help pull producer inflation much lower next month. Concern about these inflationary developments has pushed the Fed to the sidelines despite a softening economy. Because inflation is a lagging indicator of economic activity (and oil prices have declined), the Fed still believes(hopes?) inflationary pressures will recede during the remainder of the year.
–Steven Wood, Insight Economics
The July PPI data suggest that cost pressures continue to build and that the pass-through of prior increases into core finished goods prices may be accelerating. While the headline PPI is likely to get some relief from lower energy prices in August, we do not believe that this will mark the turning of underlying inflation pressures. Nonetheless, Fed policy remains hamstrung by problems in financial sector and we continue to expect that policy will remain on hold this year.
–John Ryding and Conrad DeQuadros, RDQ Economics
The jump in producer prices represents a major risk for the economy at this fragile point. While we’re fans of the “one data point does not a trend make” philosophy of economic analysis, evidence of elevated producer inflation is becoming harder to dismiss.
–Guy LeBas, Janny Montgomery
The higher than expected July core result was boosted by reported m/m increases in prices for motor vehicles, with automobile prices said to be up by 1.4% and light truck prices up by 0.8%. With demand for such products crashing and burning, reported price increases such as these can be chalked up to difficulty seasonally adjusting for dealer incentive programs which differ in timing and size from year to year. Even so, the core inflation reading is a reminder that some pass-through of higher commodity prices is occurring at the finished goods producer level.
–Joshua Shapiro, MFR Inc.
The results at earlier stages of production were ugly. The core intermediate (+2.0%) posted its biggest monthly rise in nearly 30 years, with sharp gains in textiles, chemicals, fertilizers, rubber and plastics, paper, and just about everything made of metal. The core crude (+3.4%) was also way up again, returning to the prior trend of sharp advances after a brief pause last month. Metals, especially iron and steel scrap, led the core crude upside.
–David Greenlaw, and Ted Wieseman, Morgan Stanley Research
After months of surging energy and commodity prices, final goods producers threw in the towel on rising costs, and pushed through unusually large price increases at mid-year. With energy and other commodity prices currently on the wane, the July spike in core producer prices is quite likely to be the worst we will see in the near-term.
–Kenneth Beauchemin, Global Insight
Going forward, sluggish personal consumption and worsening business capex plans should help restrain underlying inflation. Therefore, while the latest PPI report will not be welcome news for FOMC members, the recent softness of commodity prices suggest cost pressures are likely to abate over the second half of the year.
–BNP Paribas
“…higher vehicle prices…”
Perhaps the vehicle companies have fallen back to their core buyers–people who HAVE to buy a vehicle/new vehicle regardless of the price.
On the other hand, there could also just be a problem with the data.
“So we can fairly compare the current PPI of today — 9.8% — very easily with the 10% PPI back in 1981.”
The average FED rate in 1981 was 16.378% and we’re not close at 2%.
And for you deflationists; deflation should not be confused with temporarily falling prices (the current housing market)instead, it is a sustained fall in general prices. General prices include the price of wages, consumption goods and services. When was the last time that prices of consumption goods and services “fell”?
Lagging, lagging, lagging, lagging. Don’t be offput by inflation numbers. They do not tell the real story.
Truth is deflation is here – and it will be a long, arduous road back to prosperity.
From Mish Shedlock: “The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ”broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. “Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.”
Debt is being destroyed faster than it can be created – and the downward spiral will only accelerate.
Hey Winston, all indicators are lagging as they are determined retrospectively unless you have a crystal ball. No measure of money is declining, despite bank de-leveraging, and Reserve Bank Credit (the Fed’s balance sheet) has expanded at a 14.4% annual rate in the past three months.
@Pat G said “No measure of money is declining”. Appears you are wrong Pat.
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M3 Contraction – The Future Is Now
The Telegraph is reporting Sharp US money supply contraction points to Wall Street crunch ahead.
The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ”broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. “Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
The growth in bank loans has turned negative to a halt since March. “It’s obviously worrying. People either can’t borrow, or don’t want to borrow even if they can,” said Mr Stein.
Full article
Question: This is sort of the dog that didn’t bark situation–why no reaction from the bond market? Inflation numbers said to be equivalent to the early 80’s and the 10 year at 3.84%? What gives?