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 “final demand goods” (what BLS is now calling finished goods) increased 0.5 percent in March, which means that the PPI is up 1.4 percent on the year, the largest 12-month advance since a 1.7-percent increase in August 2013. The Producer Price Index for intermediate and unprocessed goods fell slightly. This suggests that inflation is still tame, although some sectors – particularly food – are seeing large increases in prices.
The tame inflation throughout the recovery has been a surprise to many economists. This is particularly true when one considers that the Federal Reserve has embarked on a hugely inflationary policy track for at least the last 5 years. On the fiscal side, deficits (while falling) have been at historic highs. Short-term interest rates are at their lowest level in more than 30 years and have been negative in many cases, and the various QE programs run through the Federal Reserve were specifically designed to inflate the dollar. It seems that even dumping money from the skies will not lead to general price inflation.
Inflation comes about when there is too much money chasing too few goods. In other words, when supply does not meet demand. True there is also monetary inflation that can come about when a country just prints oodles of banknotes, but if the banknotes are just printed and stored in a vault they really do not enter the money supply. This is what has been happening during this recovery. In fact, the very things that are dampening the economic recovery, many of which are regulatory but others which are financial, are also keeping inflation at bay.
Following the financial crisis, banks have made lending more difficult (and are actually finding holding reserves to be profitable), consumers are still repairing their balance sheets, and the housing market has been soft. In addition, companies are piling up cash and repurchasing shares rather than investing. In the end, no matter how much money is pumped into the economy, it won’t translate into inflation until it begins to circulate and that is simply not happening.
But low inflation today does not mean low inflation tomorrow. Like zombies – once money is out there it simply needs something to stimulate it. What this stimulation will be is always hard to predict. It could be a war, it could be a new invention, or it could simply be a change in the regulatory environment. When that happens inflation will turn on a dime.
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