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 just 0.1 percent in July, which means that the PPI is up 1.7 percent on the year, off slightly from the 2.0 percent level earlier in the year. The Producer Price Index for intermediate goods rose slightly continuing a trend of generally low price increases. However, the index for unprocessed goods fell dramatically in July by 2.7 percent to a 12-month level of just 0.9 percent. This is off from a 12-month level of 3.9 percent in June and even higher levels earlier in the year. This suggests that inflation is still tame and in general is being driven by prices for internationally traded commodity products like grains and energy.
Looking at the PPI over the last year, the effects of changes in commodity prices is the most notable thing, however, these changes have been cyclical, and it does not appear that commodity prices overall are trending upward. Even more interesting is how the production process has helped to moderate these changes over time, with intermediate prices cycling somewhat, but prices at the final demand level remaining relatively flat.
There are likely three reasons for this. First, commodity inputs make up less and less of overall product value. There are only pennies of commodity goods in a $400 iPad for example. Second, most commodity products are no longer purchased on the spot market but rather through long term contracts. This can not only lead to generally lower prices, but also helps to minimize cost fluctuation at the production level. Finally, wages – which can make up to 70 percent or so of overall product costs – have been flat or falling in the US over the past 6 years.
The general lack of inflationary pressure has allowed the Federal Reserve and policy makers to maintain excessively expansionary policies since the recession, and while this has done little to actually help the economy, it has allowed investors access to nearly free capital which unfortunately has not been invested in productive capacity, but rather in equity repurchase and luxury real estate.
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