Wednesday, February 16, 2011

Producer Price Inflation Is Really Pretty Average


There were a lot of reports today like this one from Barron's:

"The Producer Price Index report released by the Labor Department today is the latest sign of rising inflation pressures in the U.S. in early 2011."

The chart above shows the 12-month producer price inflation rates (data here) over the last 11 years from January of 2000 to January 2011.  Note the following:

1. Annual producer inflation in January of 3.7% was less than the inflation rates during the first half of 2010, and less than inflation from the fall of 2007 through the end of 2008.

2. The current producer price inflation is about the same as the inflation rate from 2003 through mid-2006, and the same as during 2000.   

Bottom Line: Maybe producer price inflation today seems higher than it really is because it's following a period of producer price deflation during most of 2009 (reaching -6.6% in July 2009).  But producer price inflation over the last ten months has been pretty normal, and it's not accelerating. 

23 Comments:

At 2/17/2011 3:48 AM, Blogger PeakTrader said...

Yes, and the effect of food prices on the U.S. CPI is, to quote Alan Simpson, like "a sparrow's belch in the midst of typhoon."

There are hundreds of major forces pushing and pulling the largest and most diversified economy and consumer market in the world.

US food price inflation lowest since 1992-USDA
August 25, 2010

USDA revised its food price prediction to an increase of 0.5 to 1.5 percent in 2010 from its prior forecast in late July that called for a rise of between 1.5 percent to 2.5 percent.

 
At 2/17/2011 3:49 AM, OpenID murosgroup said...

While Chine wants to have biggest GDP oil and food prices will be growth because china goverment need to support internal demand

 
At 2/17/2011 7:19 AM, Blogger juandos said...

"There are hundreds of major forces pushing and pulling the largest and most diversified economy and consumer market in the world"...

O.K. that sounds reasonable I guess...

Well PT then I wonder about the interest on the national debt and what that might possibly do to the inflation rate?

Any guesstimates?

 
At 2/17/2011 8:05 AM, Blogger VangelV said...

Here we go again. Mark posts about how American house prices have gone up, acknowledges that the price of commodities is exploding, knows that food and energy prices have risen sharply over the past year but is somehow posting figures that show that producer price inflation is mild. On what world do any of the true believers actually reside? Why are they so eager to find the data manipulation being done by foreign governments while refusing to see the same thing when the data is manipulated by our own?

 
At 2/17/2011 8:27 AM, Blogger Jason said...

Van, this is a difficult set of data to reconcile. Unless, productivity is exploding and or wages/employee costs are falling.

Although Prof. Perry has published wage data as increasing as well. So my guess is that productivity is increasing due to reducing the number of employees absolutely (reduction in force) and relatively (outsourcing to lower cost labor sources).

 
At 2/17/2011 8:42 AM, Blogger juandos said...

O.K. Professor Mark, where did my post go?

 
At 2/17/2011 9:11 AM, Blogger morganovich said...

peak-

and then CPI comes in ahead of forecast meaning the real retail sales actually shrunk in january (up .3 nominal vs .4 CPI)

.4% annualizes to 5% CPI and there are signs of more price increases to come.

"The cost of living in the U.S. climbed more than forecast in January, led by higher prices for food and fuel that may be starting to filter through to other goods and services.

The consumer-price index increased 0.4 percent for a second month, exceeding the 0.3 percent median estimate of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington"

“We are seeing turn-of-the year price increases,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said before the report. “Firms are really struggling with this. They want to raise prices and want to feel their way through and get away with it before consumers start to protest.” "

of course, CPI is still trailing well behind other inflation measures, but it look like even that heavily manipulated number is starting to show the inflation that is going on.

jason-

be careful with that productivity number. it's a value calculated from others (like velocity of money) and is never really measured in its own right, so underestimating inflation will always look like productivity gains in the reported figures.

 
At 2/17/2011 9:12 AM, Blogger Junkyard_hawg1985 said...

If the normal increase in producer prices is 3.7%/yr and a normal increase in the CPI is 2%/yr, how many years will it take before the producer price inputs exceed the selling price?

 
At 2/17/2011 9:22 AM, Blogger VangelV said...

Although Prof. Perry has published wage data as increasing as well. So my guess is that productivity is increasing due to reducing the number of employees absolutely (reduction in force) and relatively (outsourcing to lower cost labor sources).

But this is not true. While the bailouts increased non-value added government jobs as a percentage of all jobs they did nothing for the capital accumulation that is necessary for true and lasting productivity gains to take place. Now we could argue that the results are just a methodological quirk so what we are seeing is some transient fragment that will fade quickly but I do not believe that is what Mark is doing.

 
At 2/17/2011 9:31 AM, Blogger Jason said...

Morganovich, I wouldn't be surprised if the real story is a combination of manipulation of the bottom line inflation number, higher absolute productivity and lower cost labor.

Regardless, I believe much higher inflation is heading our way. We can only expect workers to do more with less and export our inflation for so long. And this appears to be part of an accelerating trend where government solutions to higher unemployment and flat wage growth result in a devalued dollar, resulting in the need for reduced labor costs...etc.

 
At 2/17/2011 9:34 AM, Blogger Jason said...

Van, I am not following your point well. Do you mean wages aren't increasing when you take out government jobs and government stimulus?

 
At 2/17/2011 9:51 AM, Blogger VangelV said...

be careful with that productivity number. it's a value calculated from others (like velocity of money) and is never really measured in its own right, so underestimating inflation will always look like productivity gains in the reported figures.

You are right about this. The BLS equation seems simple enough:

Productivity = Output/Hours-Worked

This is fine if we are interested in the productivity of a steel tubing plant because the units do not change. If the same plant increases the amount of tubing by 30% while the number of hours stay the same we can say that the labour productivity increased by 30%.

But when the BLS tries to come up with an aggregate it needs to look at a number of data sets that do not have common units. But any mathematician would tell us that to do a valid calculation that stands up to scrutiny we need a common unit. But when we look at the 'producers' we note a huge variation of products and a large number of very diverse services. These do not have a common unit of measure so it is not possible to aggregate output properly. Using USD as the common unit is troublesome because the data is effected by a large amount of non-market transactions where governments are customer. How do you measure the effect of the sale of $200 million of tanks to the Egyptian military when the funds come from 'aid' sent to Egypt by the US taxpayer?

But even without these kinds of examples the Rothbardian argument is still sound. Because we cannot define the total real output we cannot quantify it in any way that would be meaningful. Playing around with statistical methods to come up with a method that is not capable of withstanding scrutiny is not meaningful in the real world.

 
At 2/17/2011 3:35 PM, Blogger VangelV said...

Van, I am not following your point well. Do you mean wages aren't increasing when you take out government jobs and government stimulus?

Sorry for not being clear. First let me note that when we are looking at Producer data the effect of government employment is on the peripheral because most of the things that government does do not effect those numbers by much.

What I am saying is that the bailouts that were used to save the financial system did not have much of a positive effect on capital accumulation, which is what we need for productivity gains to take place.

I am saying that without a meaningful increase in capital Mark's general argument for a better economy, rising prices, and rising productivity cannot be true. As I have argued elsewhere, I suspect that the statistical tricks used by the BLS are hiding reality from view. The inflation rate is much higher than what is being reported. That makes the reported growth in the economy far too high.

 
At 2/17/2011 4:54 PM, Blogger PeakTrader said...

Juandos: "PT then I wonder about the interest on the national debt and what that might possibly do to the inflation rate?"

Depressions normally coincide with deflation.

Jason: "This is a difficult set of data to reconcile."

Perhaps, we may want to avoid how Taco Bell has managed to sell $0.99 tacos over the past 10 years.

However, unless the composition of a cow has changed, when someone eats the low end (no pun intended), someone else eats the high end.

 
At 2/17/2011 6:03 PM, Blogger Jason said...

Perhaps, we may want to avoid how Taco Bell has managed to sell $0.99 tacos over the past 10 years.

That is explainable. The venerable $0.99 taco is a loss leader. Taco Bell, has cut its costs on the item of course. Ideally you would make some token profit or break even. But Taco Bell makes its money how every Fast Food company makes its money: Side items and soft drinks. As a matter of fact, I thought Pepsi bought Taco Bell just to increase its volume syrup business.

 
At 2/18/2011 5:08 AM, Blogger juandos said...

"Depressions normally coincide with deflation"...

Hmmm, I would've thought that the debt acquiring more and more money to service it would be inflationary especially with this administration's use of quantitative easing...

 
At 2/18/2011 10:17 AM, Blogger VangelV said...

Depressions normally coincide with deflation...

You might want to rethink this.

Hyperinflation in Zimbabwe

Hyperinflation

Hyperinflation, Money Demand, and the Crack-up Boom

 
At 2/18/2011 10:24 AM, Blogger morganovich said...

"Depressions normally coincide with deflation"..."

tell it to zimbabwe or the weimar republic or the austro-hungarians or the argentines.

that is not nearly as true as you suspect.

in many cases, depressions are created by (or worsen in response to) extremely loose money, often driven by a need to pay external debt and run ruinous social programs.

it is not uncommon to see rampant inflation and dramatic real GDP contraction simultaneously.

Argentina had triple digit inflation and double digit real GDP contraction simultaneously.

 
At 2/18/2011 11:46 AM, Blogger PeakTrader said...

Deflation Wikipedia

"Deflation is correlated with depressions – including the Great Depression...However, historically not all episodes of deflation correspond with periods of poor economic growth."

 
At 2/18/2011 12:05 PM, Blogger PeakTrader said...

Robert Lucas (Nobel Prize economist at the University of Chicago):

"The central problem of depression-prevention has been solved, for all practical purposes."

My comment:

The 1970s was a bust phase of a long-wave business cycle, similar to the 1930s.

Accommodative monetary policy prevented Great Depression II in the 1970s.

 
At 2/18/2011 12:46 PM, Blogger morganovich said...

""The central problem of depression-prevention has been solved, for all practical purposes.""

keynes said that same thing in the 20's.

we were in recession for 8+ of the 10 years from 2000-2010 if you use any kind of legitimate inflation gauge.

http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

the BEA GDP delflator is so cooked that is is giving off readings 2/3 lower even than CPI.

consumer debt exploded during that period precisely because real interest rates were negative and people could see it even if the fed could not.

thus, we got a housing bubble and the bust, and are now in very dangerous territory with a return of stagflation that we are mistaking for growth.

idea like long wave business cycles are just Rorschach style nonsense like fibbonaci retracements that mathemeticians see in the data when they stare at it for too long.

you can make anything look like cycles if you have flexible enough parameters.

look, us debt to GDP ratio causes global warming:

http://wattsupwiththat.com/2011/02/16/forget-co2-us-debt-causes-warming/

 
At 2/20/2011 9:14 AM, Blogger VangelV said...

Deflation Wikipedia

"Deflation is correlated with depressions – including the Great Depression...However, historically not all episodes of deflation correspond with periods of poor economic growth."


This is why you should not rely on Wikipedia. If you have a hard currency then the statement above would be acceptable. In a fiat currency system the Weimar or Hungarian experience is much more likely. You have governments keep printing more and more money and it dies as a hyper-inflationary depression takes hold.

As is typical of Keynesians, the Wiki people have missed the boat in a big way. For example, they write that, "a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by economists as part of the modern business cycle."

Let us ignore the typical ignorance of Wiki authors about the business cycle and move on to the Wiki page on hyperinflation. As examples of hyperinflation we are provided with Angola, Argentina, Austria, Belarus, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, China, Georgia, Germany, Greece, Hungary (1922-1924 and 1945-1946), Israel, Krajina, Mexico, Nicaragua, Peru, Philippines, Poland, 1921-1924 and 1989-1991, Republika Srpska, Romania, Russian Federation, Taiwan, Ukraine, United States, Yugoslavia, Zaire, and Zimbabwe. In all of these cases every country experienced a major depression that saw economic activity and real production collapse. Like hyperinflation, depression is the aftermath of a reckless credit expansion.

I believe that the confusion stems from duration. Since governments are totally discredited and money printing destroys the currency rapidly the worst part of hyper-inflationary depressions tend to end fairly quickly, just as deflationary depressions did in a hard money system where markets corrected quickly when governments got out of the way. But in the case of the Great Depression we saw Hoover and FDR do their best to intervene as much as they could so they wound up with a weak economy for the better part of 15 years. It wasn't until after the government began to scale back on its intervention that the economy was finally able to recover properly.

 
At 2/20/2011 9:39 AM, Blogger VangelV said...

Robert Lucas (Nobel Prize economist at the University of Chicago):

"The central problem of depression-prevention has been solved, for all practical purposes."


It is clear that history has refuted Dr. Lucas. We have seen a number of countries experience depressions since the 1970s.

And as with the rest of the Chicago School and the Keynesians Dr. Lucas is a panderer to power who refuses to stick with the free market principles that he claims to support. Instead of slamming Bernanke for this reckless monetary injections he cheered the quantitative easing announcements and argued that they would prevent a crisis even though the Fed was simply buying impaired assets well above market value. In fact, he even stated that he did not care about the quality of the assets that the Fed was buying because all that mattered was the quantity of assets purchased. It seems to me that he needs to go back and read the papers which won him the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. His main argument was that government planning goes wrong because people change their behaviour to counteract the effects of interventionism. What this really means is that the Bernanke experiment will end badly as people counteract of his actions to make bets that will make them rich even as the economy keeps sliding towards the abyss.

My comment:

The 1970s was a bust phase of a long-wave business cycle, similar to the 1930s.

Accommodative monetary policy prevented Great Depression II in the 1970s.


I thought that the crisis in the 1970s was only ended when Volker put a stop to the reckless monetary expansion. You might want to check your facts.

 

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