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” was up by 0.2 percent in October (seasonally adjusted), which means that the PPI is up 1.5 percent on the year, up slightly from the 1.3 percent level at the same time last year, but down from the past few months. The Producer Price Index for processed intermediate goods fell 0.9 percent in October reflecting a 3.2 percent decrease in prices for processed energy products, while the index for unprocessed goods fell 2.4 percent, reflecting a 5.5 percent decrease in energy costs. This reflects a continued lack of any inflationary signals in the broad marketplace. Even prices for intermediate services were basically flat in October. Producer price decreases were broad based with only import (or what the BLS calls Trade) prices up – but only slightly.
Looking across product categories shows that while food prices (up 4.5 percent on the year) and those for consumer non-durable goods (up 3.9 percent on the year) have risen, there have been corresponding offsets in prices for energy (down 3.7 percent). Most other prices have been increasing in the 1 to 2.5 percent range overall, which is well in line with the targets set by the Federal Reserve.
We have long forecast growth in general inflation, partly due to the huge increase in the US money supply; however, this has not come to pass. We believe that this is because most of the new money has not entered the economy – as Keynesians would suggest the velocity of money has fallen dramatically. The question now is, will continued low interest rates, and a huge supply of untapped capital eventually start to work its way into the economy. The overall US economic numbers are positive and the business cycle is peaking. Usually at this time, firms and individuals begin to “over bet” on the factors that have been driving economic growth – for example housing in the last recession, and dot-com companies in the recession of the early 1990s. Most investment following the end of the 2007-2008 recession has been in assets – namely equities and commercial real estate. As the next recession approaches, the over-exuberance could lead to dramatic drops in the value of equities, REITS and other financial assets, but may not have as dramatic an impact on Main Street as the “real economy” has not grown nearly as rapidly as the financial economy.
All told, low inflation, low interest rates, easy access to capital, and a good supply of underutilized labor suggests that once firms no longer see an advantage to buying back shares, there are good potential investment opportunities in the American economy. If this is the case, a recession occurring as a result of the current mal-investments should be shallow and short lived.
What Can JDA Do for You?
Each month John Dunham and Associates provides information on current US economic indicators.
To stay in the loop and receive our value-added commentary that further describes how changes in these key economic data are important to your business or industry:
Subscribe to the Monthly Manifesto
Why subscribe to the JDA Monthly Manifesto?
This monthly economic newsletter is one way that John Dunham & Associates assists our clients and friends to better communicate and manage issues based on sound economic and fiscal research — what we call Guerrilla Economics.
For more information on how we can help on your legislative issues, please contact us at 212-239-2105.