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 Producer Price Index for finished goods increased 0.8 percent in June, the index for intermediate goods advanced 0.5 percent, and the crude goods index was unchanged. This suggests that inflation is still tame, but rising particularly for finished products. In fact, once the seasonal adjustments are removed, prices for finished goods were up 2.5 percent on an annualized basis. While much of the increase was due to volatility in the energy sector, overall prices are also rising. The same was true at the intermediate and crude processing stages.
Interestingly, the trend for crude materials – once seasonal adjustments are removed, shows rapidly increasing prices – something that should be expected considering the weakness in the dollar. After falling fairly rapidly during the last part of 2012, year over year prices in the past quarter were up – 3.1 percent year over year in April, 7.1 percent in May and now 11.0 percent in June. This suggests that the top line numbers are highly subject to statistical factors rather than actual price changes.
Looking across categories, consumption goods like food and non-durables are up on a year over year basis by 3.0 and 3.7 percent respectively. Durable goods (manufactured products) are holding producer level inflation down as they are up only 0.8 percent on a year over year basis. Looking across individual products producer price changes for crude goods are up faster than those for intermediate goods which are up faster than those for finished goods. This means that manufacturers (and workers) are eating much of the overall cost of inflation, something that is being reflected in both falling wage and falling productivity figures. Low inflation is therefore, due to falling wages and profits, while the weak dollar is pushing up prices for crude products. This is unsustainable in the long run, and is a reflection of how policy is showing up in the real economy as workers become poorer, and firms less profitable and productive.