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. Currently, this is one of the most important economic indicators to watch, as both fiscal and monetary policy are extremely loose right now – something that should be leading to inflation sooner rather than later.
The Producer Price Index for finished goods increased 0.3 percent in August, the index for intermediate goods was unchanged, and the crude goods index actually fell by 2.7 percent. This suggests that deflation is a greater risk that inflation, but we do not believe that this is actually the case. In fact, on an annualized basis, prices are up across all categories, even though food prices at the crude level are down significantly.
Last month, crude materials prices fell across the board; however, this was prior to the Federal Reserve announcing that it will continue the unlimited purchases of bonds on the open market (the so called QE3). The dollar had been strengthening on world markets but fell significantly after the Fed’s announcement. As such, it is likely that this decrease will be reversed in the coming months. Finished and intermediate goods prices rose nearly across the board on an unadjusted basis, and this still suggests that prices at the consumer level will be up by at least 3 percent over 2013 since manufacturers and retailers seem to be starting to take more margin – reversing the past trend. Whether or not this will hold up as the dollar continues to fall remains to be seen.