The Producer Price Index is one of two key market pricing series put out by the Bureau of Labor Statistics on a monthly basis. It is one of the oldest continuous data series collected by the Federal government, having begun in the 1890s. It consists of a weighted index of prices measured at the wholesale and production levels. The BLS releases an index for commodities (for example energy, natural gas, scrap metals), intermediate goods (like fuel, lumber, steel bar), and for finished goods. The PPI serves as a good indicator of medium term inflation prospects. It is not measuring consumer prices, and many producer prices are locked into longer term contracts. As such, it measures spot prices better than actual consumer inflation.
The March PPI report continues to suggest that inflationary pressures are muted in the United States. The Producer Price Index for finished goods decreased 0.6 percent in March, the index for intermediate goods fell 0.9 percent, and the crude goods index declined 2.5 percent. However, nearly the entire drop was due to prices for “finished energy goods,” namely gasoline which fell 3.4 percent in March, the largest decline since a 3.5-percent decrease in February 2010. A 6.8-percent drop in the gasoline index accounted for more than eighty percent of the March decline. This follows a 3.0 percent increase in energy prices in the prior month. Without the decline in energy prices, the PPI would have increased.
Producer prices are driven by two main factors – the cost of raw inputs and the cost of labor. Labor markets continue to be extremely weak keeping pressure on wages. This is why Keynesian economists like those at the Federal Reserve continue to believe that there is little chance of inflation even over the long term. In addition, economic and political problems in other large economies such as Europe and Japan are keeping the value of the dollar from falling dramatically. Both of these factors factor on the PPI and on overall inflation.
However, we continue to worry about the extremely loose monetary policies being conducted by the Fed – particularly since they are having little impact on the overall economy other than bubbling asset markets. It is possible that another bubble is occurring in the US equities market and investors may want to be wary of new record highs for these indexes. In addition, inflation can turn on a dime, and with extremely low interest rates and the availability of cheap capital, now is still an excellent time for investors to purchase hard assets – particularly those for which there are productive uses. These low rates cannot continue forever, and even small shifts may lead to rapidly increasing interest rates for smaller and even medium sized firms.