Consumer Price(s) Incalcitrant

While we consider the PPI’s view of inflationary pressures as overstated by simple arithmetic and the math of commodities, there’s no denying that producer prices have risen by a substantial amount. The question, the whole issue, is why. If it is truly because price pressures are building and have grown close to breaking out in systemic fashion, then that would indicate the sustainable trend more consistent with the term inflation.

In order to reach that threshold, producer prices must become consumer prices otherwise disaffected businesses are left holding the bag. Needless to write, that’s the opposite. Such a case very quickly turns depressive, disinflationary if not in the extreme – firms that can’t pass along input costs to their customers will be threatened as to their bottom lines.

And the bottom line in that situation is when the business sector caught between the rock of producer prices and the hard place of no pricing power can only release the burden by over-governing what they can control, meaning costs therefore labor.

Producer prices are up, as noted, but not yet to such that extreme. Consumer prices, either way, are not. The PPI rises at the fastest rate in a very long time while the CPI rises at the fastest rate since the not-very-inflationary 2018 period. This is definitely an instance when “highest in three years” undersells the disappointment.

Start with base effects – comparing prices to March 2020 and the onset of outright deflation – and then go longer into oil and gasoline prices. The net result so far as the BLS can calculate is a headline CPI rate of +2.62% for the month of March 2021; again, the highest since the middle of 2018 back when Jay Powell was attempting to cheerlead inflation into existence because it was nowhere near a realistic possibility.

He’s now on this side of being rational (by accident, but still) because he can do the numbers, too. Much of that 2.62% year-over-year increase was pure gasoline; motor fuel prices last month were up 22.7% on average when compared to March last year. It sounds very 1970s-ish until you realize that gasoline prices had accelerated in similar fashion in that same year as Powell’s big mistake.

Hardly unusual, which is why energy prices are treated as the volatile piece of the consumer basket.

Outside of what goes into most vehicles, consumer prices continue to be incomprehensibly tame (at least when compared to “monetary” aggregates like M2 or the Fed’s bank reserves). The so-called core CPI, stripping out volatile food and energy, gained 1.65% year-over-year, up from a near-series low of 1.28% in February. All that did was push the rate from among the lowest in its history to slightly better than the lowest in its history.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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