The PPI is Ripping Higher, What Does That Mean for Future Inflation?

Last Friday, the BLS released its Produce Price Report (PPI) for August.

Details 

• The Producer Price Index for final demand increased 0.7 percent in August, seasonally adjusted.
• Final demand prices moved up 1.0 percent in July, the same as in June. 
• On an unadjusted basis, the final demand index rose 8.3 percent for the 12 months ended in August, the largest advance since 12-month data were first calculated in November 2010. 
• Leading the August increase in the index for final demand, prices for final demand services rose 0.7 percent. 
• The index for final demand goods moved up 1.0 percent. Prices for final demand less foods, energy, and trade services moved up 0.3 percent in August after increasing 0.9 percent in July. 
• For the 12 months ended in August, the index for final demand less foods, energy, and trade services rose 6.3 percent, the largest advance since 12-month data were first calculated in August 2014.  

Intermediate PPI Year-Over-Year

• Stage 1 up 21.1%
• Stage 2 up 21.8%
• Stage 3 up 20.2%
• Stage 4 up 12.1%

Huge Inflation Passthrough Coming?

I saw a report over this weekend predicting a big passthrough on inflation. 

However, the idea appears to have little merit, at least as far as CPI measurement goes.

PPI Final Demand, Intermediate Demand, CPI 

Huge swings in intermediate stage PPI have little relation to the CPI. The next chart shows why.

PPI Final Demand vs CPI 

Year-Over-Year Change 

• CPI (July): 5.4%
• PPI Final Demand Commodities: 19.9%
• PPI Final Demand Finished Goods: 10.5%
• PPI Final Demand Services: 6.4%
• PPI Final Demand: 8.3%

Note the huge influence of services on the PPI. Wild swings in commodities are greatly tempered by services. 

We are not going to see a big jump in the CPI-based off those intermediate prices. 

Little Inflation?

No! For starters, 5.4% is not little. 

More importantly, the CPI is a very poor measure of inflation. 

The CPI does not count home prices or prices paid on behalf of consumers like Medicare and corporation-paid health care policies.  

If I could figure out how to weight and factor in health care properly, I would do it.

I do know a reasonable way to factor in home prices and calculate better measures of real interest rates.

New Record Low Real Interest Rate -8.5 Percent

Factoring in home prices, real interest rates hit a new record low in a series that dates to 1987.

For discussion, please see Housing Adjusted Real Interest Rates Sink to a Record Low -8.5 Percent