It's Hard to Make a Case for Producer Price Inflation

by: Mark J. Perry

Based on today's PPI report from the BLS (pdf), the charts above are updated from last month's CD post on producer price inflation, where I suggested that it's hard to make a strong case for producer price inflation when looking at a 10-year history of the PPI and its three main components.

The 12-month inflation rate of the crude material component of the PPI has been trending downward, and is less than half of the rate compared with a year ago, and about one-third the peak for crude material inflation in 2008. The other main PPI components (intermediate goods and finished goods) have turned up a little bit recently at annual rates, but finished goods inflation is below its year-ago level, and both finished good and intermediate inflation rates are still below their levels in 2007, and about the same as their levels from mid-2002 to 2006.

The bottom chart above for just the overall PPI annual inflation rates over the last ten years shows a similar pattern: A slight increase in recent months for PPI inflation, but still below the levels in March and April of last year, below the 2008-levels, and about the same as the 2004-2005 period. And the PPI level of 199.1 in March is still 3.1% below the peak of 205.5 in July 2008.

Update: Brian Wesbury and Robert Stein present an opposing view, and make the case here for inflation:

"The inflation problem at the producer level continues to get worse. While headline producer price inflation fell short of consensus expectations in March, we would not call an increase of 0.7% good news. Prices are still up 5.8% in the past year and accelerating upward. In the past six months producer prices are up at a 10.9% annual rate; in the past three months they’re up at a 13% rate. Most of the gain in March was due to energy prices.

But, while the Federal Reserve can still claim core inflation is low for consumers, core producer prices are accelerating, up 0.3% in March and up at a 4.2% annual rate in the past three months. Further up the production pipeline, core intermediate prices increased 0.9% in March and are up at a 9.8% annual pace in the past six months; core crude prices fell 2.3% in March but are still up at a 29.5% rate in the past six months. Based on these inflation signals and the current state of the economy, the Fed’s monetary policy is way too loose."