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.
In spite of continued loose monetary policy, the Producer Price Index continues to point toward low inflation. The index for finished goods decreased 0.2 percent in October, following a slight decrease in the prior month. The index for intermediate goods fell even faster (0.4 percent), and the crude goods index was down 0.9 percent. Much of this was driven by lower prices for energy which was down 2.9 percent at the crude level over the month. Discounting for energy, inflation is still tame, but it is rising once energy is taken out of the equation, particularly for finished products.
Interestingly, outside of the last month the trend for crude materials shows rapidly increasing prices – something that should be expected considering the weakness in the dollar as a result of the Federal Reserve’s policy decisions. Year over year prices for crude materials rose rapidly through July but have tapered off since then. At the same time, prices for finished goods have risen much less quickly. Since corporate profits are up over the year, this suggests that much of the reason for lower inflation at the consumer level has been due to reductions in employment and earnings – something that is also reflected in the Consumer Confidence Index (see below). If this trend continues it confirms that the Administration’s loose monetary policy has been one of the main reasons why there has been no employment growth during this recovery.
Looking across categories, outside of a few items like shellfish and dried vegetables, price increases have been fairly moderate at the finished goods level. Gasoline prices are down substantially year over year, as are prices for computers. Crude materials prices are being held down by substantial decreases in the price of grain (year over year) from what were extremely high prices in 2012. On the other hand, crude energy prices (particularly prices for natural gas) are up over the prior year, as are the prices for most crude industrial materials.
The overall increase in the price of crude materials relative to finished goods is unsustainable in the long run, and as was said before is likely a reflection of how policy is showing up in the real economy as workers become poorer, and firms less profitable and productive. Falling labor costs cannot continue indefinitely, and will eventually reverse (as have falling housing costs). These items in and of themselves will eventually start to drive higher consumer prices.