Producer Prices Feed Inflation

A quick note on the indications of faster inflation, which keep dropping in. Reports the Bureau of Labor Statistics:

The Producer Price Index for final demand increased 1.3 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance is the largest since the index began in December 2009. Final demand prices rose 0.3 percent in December and 0.1 percent in November.

These are, again, seasonally adjusted numbers, which convey somewhat of a longer-term trend in the variables reported. For this reason, it is interesting to compare these numbers to the unadjusted ones in the same report:

On an unadjusted basis, the index for final demand moved up 1.7 percent for the 12 months ended January 2021, the largest increase since climbing 2.0 percent for the 12 months ended January 2020. Two-thirds of the January advance in prices for final demand can be traced to a 1.3-percent rise in the index for final demand services. Prices for final demand goods increased 1.4 percent. Prices for final demand less foods, energy, and trade services moved up 1.2 percent in January, the largest advance since the index began in September 2013. For the 12 months ended in January, prices for final demand less foods, energy, and trade services rose 2.0 percent, the largest increase since a 2.1-percent advance for the 12 months ended June 2019.

These numbers suggest that there is no specifically worrisome inflation trend in the PPI. After all, it was worse two years ago, right?

No. The interesting information in these numbers is the comparison between the seasonally adjusted and non-adjusted numbers:

  • In January 2020 the annual increase in producer prices was 2.0 percent before seasonal adjustment, and 0.3 percent after, which means that the seasonal variations accounted for 1.7 percentage points or 85 cents of every dollar in price increases;
  • In January 2021 the annual increase was 1.7 percent before seasonal adjustment and 1.3 percent after; this time, three quarters of every dollar in price increase is independent of seasonal variations.

In other words, producer prices today convey a stronger, sustained trend of inflation. In addition, the rise in prices for final-demand products indicates that this inflation pressure is feeding into consumer prices.