U.S. Producer prices accelerate sharply in July

U.S. Producer prices accelerate sharply in July

*The Producer Price Index for final demand rose 1.0% in July, lifting its yr/yr rise to 7.7%, while the core PPI for final demand excluding food, energy and trade services also rose 1.0%, lifting its yr/yr rise to 6.2% (Chart 1). The six-month annualized increases in the PPI for final demand headline and core are 10.3% and 7.7%, respectively, clearly indicating acceleration (Chart 2). The PPI for intermediate demand is accelerating even more rapidly, suggesting that the pipeline for inflation is building. If aggregate demand remains strong, as we have been forecasting, then businesses will have flexibility to raise product prices along their supply chains and to consumers.

*The PPI for final demand for goods rose 0.6% in July, and 0.9% excluding food and energy, boosting their yr/yr increases to 14.9% and 7.5%, respectively, while the PPI for final demand for services rose 1.1%, lifting its yr/yr rise to 5.8% (Chart 3). Within this category, the PPI for final demand for transportation and warehousing rose 1.7%, lifting its yr/yr rise to 11.8% (Chart 4).

*The Bureau of Labor Statistics’ old methodology provides a rich historical context for the acceleration of the PPI. Under the old methodology, the PPI for finished goods excluding food and energy has accelerated significantly—it has risen 6.8% annualized in the last six months, lifting its yr/yr rise to 4.3%. Excluding a temporary jump during the financial crisis, it is at the highest level since 1989 (Chart 5). The PPI for intermediate goods excluding food and energy has risen at a 30% annualized pace in the last six months, lifting its yr/yr rise to 20.6% (Chart 6). This is the highest level since the first oil shock in 1973-1974.

*The acceleration of the PPI and high CPI are not surprising to us and entirely consistent with a wide array of anecdotal evidence. Pressures on production costs will remain, as businesses must raise production to meet strong demand and replenish depleted inventories while dealing with supply bottlenecks and labor supply shortages. Unprecedented monetary and fiscal stimulus are expected to generate sustained strong growth in aggregate demand. Some of the price increases reflect supply bottlenecks; however, more and more, the mounting inflation pressures at the producer and consumer levels are taking on characteristics of traditional cyclical inflation generated by excess stimulus rather than temporary blips that will conveniently dissipate.

Chart 1: PPI Final Demand – Total and Core

Chart 2: Core PPI (6-month annualized vs. yr/yr)

Chart 3: Final Demand – Core Goods vs. Services

Chart 4: Final Demand Transportation and Warehousing Services

Chart 5: PPI – Finished Goods less food and energy (old methodology)

Chart 6: PPI – Intermediate Materials less food and energy (old methodology)

Mickey Levy, [email protected]

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