Why Producer Prices (Like Lumber Prices) Are Rising Faster Than The CPI

“Homebuilding rebounded less than expected,” NBC reported recently, “as very expensive lumber and shortages of other materials continued to constrain builders’ ability to take advantage of an acute shortage of houses on the market.”

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Lumber isn’t the only material that has experienced significant price increases over the past year. The same NBC article notes that steel and copper prices are also hampering the housing market. The general pattern of price inflation is that higher-order goods—those furthest from the consumer in the production process—tend to react sooner and more significantly to changes in the money supply. We can see this trend in the dramatic disparity between the Producer Price Index (PPI) and Consumer Price Index (CPI).

(Click on image to enlarge)

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When people discuss inflation, they rarely have in mind monetary expansion, which is an important driver of price inflation. Instead, they think almost exclusively of consumer prices.

The Myth of Monetary Neutrality

The theory of monetary neutrality justifies this mindset, under the assumption that prices adjust evenly to changes in the money supply. Monetary neutrality is a relic of the age before the marginal revolution, when objective theories of value—most notably the labor theory of value—were standard among economic thinkers, including liberals such as Adam Smith. In fact, this idea was given early expression by one of Smith’s greatest influences, David Hume, who posed a thought experiment in his Political Discourses:

Suppose, that, by miracle, every man in Britain should have five pounds slipt into his pocket in one night: this would much more than double the whole money that is at present in the kingdom; and yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest. And were there nothing but landlords and peasants in the state, this money, however abundant, could never gather into sums; and would only serve to increase the prices of every thing, without any farther consequence.1

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