June 28, 2022

Inflation keeps coming

I keep talking about inflation, but only because it matters and it is slated to keep getting worse.  You want evidence?  You should want evidence.  Well here's some.  The most common measure of inflation is the Consumer Price Index (CPI).  The Bureau of Labor Statistics (BLS) which produces the CPI also produces the Producer Price Index (PPI) - the rate of inflation for producers rather than consumers.  It's the supply side of inflation.  

When the price for producers increases, what does that mean for consumers?  The PPI is a leading indicator with respect to the trailing CPI.  Eventually the producer inflation rate will work it's way through the supply chain to reach consumers.  If it costs them more to make, they will pass on the cost to the prices they charge. See here, and here for examples. That means that downstream from the PPI is the CPI.  

What do we see in the latest PPI?  Directly from the BLS:

Producer prices for goods rose 16.3 percent, while prices for services rose 8.1 percent.

Producer prices for foods rose 16.3 percent over the year ending April 2022, while prices for energy rose 40.0 percent. Prices for goods less foods and energy rose 10.1 percent.

Producer prices for trade services rose 15.4 percent over the year ending April 2022, while prices for transportation and warehousing services rose 22.6 percent. Prices for services less trade, transportation, and warehousing rose 3.2 percent.

For comparison, the latest CPI rate

From May 2021 to May 2022, the Consumer Price Index for All Urban Consumers increased 8.6 percent, the largest 12-month increase since the period ending December 1981.

If you drill down on the trends in the CPI, the leading cost increase was energy and it is continuing to rise unabated.  That impact has yet to work it's way through the PPI; producers are still consuming increasing energy costs which will have an impact on their future production costs, and therefore future CPI readings. It means food and other goods will continue to see an increase in prices for consumers. It's not over yet.

The way to mitigate this would have been to allow the Keystone pipeline to finish being built, increase the number of domestic refineries, continue with the expansion of domestic oil production to expand the production from the records created under president Trump.  Not only was that not done, previous progress was actually undone.  Expect  as a result, that energy prices will continue to rise for the foreseeable future.  Let's Go Brandon.  

As the PPI continues to rise, the CPI will continue to follow.

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