Wednesday, March 16, 2011

10-Year History of PPI Inflation: Is There a Case?

The BLS released data today on the Producer Price Index for February.  Looking at the 10-year history in the graph above of annual price increases for the major components of the Producer Price Index, it seems like it would be hard to make a really strong case for producer price inflation.  The crude material component of the PPI is falling, and the other components have turned up a little bit recently at annual rates, but are still below the levels in 2007, and about the same as in 2003, 2004, 2005 and 2006. 

The chart below for 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, April and May, below the 2008-levels, and about the same as the 2004-2005 period.  And for the PPI level, 195.5 in February, that's still almost 5% below the peak of 205.5 in July 2008.  

Q: Based on the data, is there really a strong case for concern about rising PPI inflation?  



At 3/16/2011 4:29 PM, Blogger PeakTrader said...

It could mean slow economic growth instead of inflation.

How many more years will it take to reach full employment?

At 3/16/2011 6:03 PM, Blogger Benjamin Cole said...

You know, we could worry about inflation, dying in a plane crash, getting killed by terrorists, who knows what else hyped up fears.

Glenn Beck is carnival-barking about gold, has gold sponsors, so he has inflamed his public of right-wing baboons to screech about inflation. I guess Dallas Fed martinet Richard Fisher is in that particualr troop. Money see-money do.

Before we fight inflation, can we please have some old-fashioned prosperity?

At 3/16/2011 6:06 PM, Blogger morganovich said...


that is not raw data. is it heavily adjusted.

using adjusted data to argue that adjusted data is accurate seems circular.

i don't think it proves anything.

if we use a non adjusted measure of input inflation over that last 10 years (like the constant commodity index) we see an index that has gone from 180 10 years ago to 635 today, a 252% increase. that annualizes to 13.4% per year. that simply does not square with the heavily manipulated data out of the BLS.

look at the most recent PPI number. even using their highly questionable methodology, they cannot mask the blooming inflation.

WASHINGTON (MarketWatch) ā€” U.S. wholesale prices jumped a seasonally-adjusted 1.6% in February as food costs experienced the biggest one-month rise since 1974, the Labor Department reported Wednesday.

The rise in producer prices last month follows increases of 0.8% in January and 0.9% in December

The wholesale price of food saw the biggest increase last month. The food index surged 3.9%, the largest gain since November 1974. Most of the increase stemmed from higher cost of fresh and dry vegetables."

PPI is up 3.33% in the last 3 months alone. annualize that and you get 14% inflation.

you asks if we should be concerned about that?


that is 70's style inflation.

this result is confirmed by looking at the price data of imports and exports (data which is not manipulated by the BLS)

import prices up 1.4% in feb after 1.3% in jan.

export prices up 1.2% after 1.3% in jan.

these are HUGE numbers and annualize to numbers in the high teens.

every objective measure of price is up big and accelerating. how much of this are you willing to ignore to maintain belief in the adjustment process of the BLS?

setting your scale to read 20 pounds lighter will not help you fit into your pants.

At 3/16/2011 6:30 PM, Blogger PeakTrader said...

There's little inflation pressure both on the consumption and production sides.

On the consumption side, the U.S. still imports more than it exports and domestic demand remains weak.

On the production side, productivity is high and input costs remain low (labor is two-thirds of input costs):

Output or inflation is a function of technology (or productivity) on labor, capital, raw materials, land, energy, etc..

U.S. Productivity Rose 2.6% In Q4, Labor Costs Fell 0.6%

Productivity increased by 2.6 percent in the fourth quarter...reflected a modest acceleration from the downwardly revised 2.3 percent increase seen in the third quarter.

Unit labor costs fell by 0.6 percent in the fourth quarter...Labor costs were down 0.1 percent year-over-year.

At 3/16/2011 6:35 PM, Blogger Benjamin Cole said...

Peak Trader-

Great numbers. I have been pointing our for two years we have falling unit labor costs. How do you get inflation with falling unit labor costs?

Commodities are just not as important as they used to be. We use less and less compared to GDP. Oil use to GDP output has been falling for decades.

At 3/16/2011 6:52 PM, Blogger PeakTrader said...

In the U.S., the future seems to be more natural gas for households and firms to keep the oil flowing for transportation:

Oil companies bet future is natural gas
November 10, 2010

In the United States and Europe, natural gas is primarily used to heat homes. About three in five American homes use it for heat.

And more and more power plants are using it to generate power. Natural gas is used to generate 23percent of electricity in the U.S., up from 16 percent a decade ago.

Natural gas is used in small amounts for transportation in the U.S., mostly for city buses and garbage trucks.

At 3/16/2011 6:55 PM, Blogger bix1951 said...

I don't really care about the price of gold or diamonds going up because I don't use the stuff.

substitution is alive and well in the economy

At 3/16/2011 7:34 PM, Blogger Benjamin Cole said...

All over the world, we have natural gas up our rear ends.

There is gobs and gobs of the stuff, thanks to the discovery of shale, and other new sources.

You can run cars on methanol (now selling for about $1.28 a gallon) or CNG.

The USA has a fantastic opp. to go heavy into natural gas, and radically curtail of involvement in the Middle East.

Save hundreds of billions every year on oil imports and military outlays.

Oh, why would we do that?

At 3/16/2011 7:42 PM, Blogger morganovich said...


productivity numbers are a function of inflation.

if you understate inflation, you overstate productivity.

you cannot use that figure the way you are trying to.

i also question your figure that labor is 2/3 of input costs. that sounds extremely high to me.

where are you getting that number?

At 3/16/2011 7:48 PM, Blogger morganovich said...


but what about all the other prices?

these are the componentsThe Thomson Reuters Equal Weight Continuous Commodity Index is recognized as a major barometer of commodity prices. The index comprises 17 commodity futures that are continuously rebalanced: Cocoa, Coffee ā€˜Cā€™, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange Juice, Platinum, Silver, Soybeans, Sugar No. 11, and Wheat. The index trades on the ICE Futures Exchange. of the constant commodity index:

their compound inflation for the last decade has been over 13% a year and that understates the actual inflation as the index gets rebalanced to even %'s each year.

surely there are items on that list you care about or do you not eat, drive, or wear clothes?

At 3/17/2011 2:46 AM, Blogger PeakTrader said...

Morganovich, you're making an assumption that's not supported by anything.

The quantity and quality of units produced increased with fewer jobs. Here's one example:

U.S. Manufacturing: Output vs. Jobs Since 1975
Jan 24, 2011

"Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%...the average American manufacturer is over three times more productive today than they were in 1975."

Also, I may add, after the Creative-Destruction process in the early 2000s, U.S. firms, particularly high-tech firms, produced more output with fewer inputs (e.g. instead of increasing inputs faster than output), which is disinflationary.

Labor Productivity and Costs

"In the U.S. nonfarm business sector, labor cost represents more than sixty percent of the value of output produced."

At 3/17/2011 3:27 AM, Blogger PeakTrader said...

Over the 1995-00 bubble, inflation averaged 2.5%, and over the 2002-07 bubble, inflation averaged 2.9%.

However, in the late '90s, commodity prices fell to low levels (e.g. oil $10 a barrel and gold $250 an ounce).

So, there were more powerful factors that influenced the general price level.

At 3/17/2011 8:31 AM, Blogger morganovich said...


i think it is you who are making unsupported assumptions.

the figures you cite are based on nominal output, not units.

understate inflation in such a case and it will look like productivity.

you then cite a bunch of inflation numbers based on the flawed BLS methodology that was designed to avoid showing inflation.

your whole case is based on circular logic.

At 3/18/2011 2:28 AM, Blogger PeakTrader said...

Morganovich, I'm not claiming the aggregate data are wrong and I'm right.

The only flaw is incomplete data, e.g. 5% of the puzzle is missing, but that wouldn't significantly change the picture.

At 3/18/2011 3:19 AM, Blogger PeakTrader said...

It's easier to change the pictures of segments of the economy than the picture of the macroeconomy (including the general price level).


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