Never Bark At the Big Dog. The Big Dog Is Always Right.
The Bureau of Labor Statistics has released its numbers for the Producer Price Index for October. They confirm the suspicion I had last week when I said:
Inflation is here and it is not going away, with third-quarter GDP numbers showing inflation close to five percent. And let’s not forget that the GDP-based inflation measurement is more conservative than the more widely used Consumer Price Index, the October numbers of which the Bureau of Labor Statistics will publish next week. It is entirely possible, even likely, that the Fed, having a preview of those numbers, got so scared of where inflation is heading that they decided it was reason enough to move faster with their rollback of Treasury purchases. If so, we should expect a bombshell or two on Tuesday and Wednesday when PPI and CPI numbers are released.
And a bombshell it was. Compared to October last year, producer prices are up 22.6 percent. This is in fact an acceleration of PPI inflation compared to the last few months: after reaching 19 percent in May, producer prices stayed virtually still in the sense that they remained roughly at a rate 20 percent higher than last year. This rate, newsworthy in itself, is not the biggest story – that would instead be the fact that the October inflation leapt up as much as it did. By October last year, the economy was moving out of its artificial shutdown, with economic activity coming back online again on a broad scale.
It is sometimes suggested that the high inflation rates this year are due to the recovery from the shutdown. If this was the case, though, the bulk of that inflation would have been visible late last year and early this year; we are now in November 2021, closing in on two years from when the covid-19 epidemic started, and inflation rates are still rising. Furthermore, if inflation was strictly the cause of a rapid return to normal for the economy, there would be little to no difference in inflation rates between this year and 2019, the last year before the artificial shutdown.
A review of two-year inflation rates for the Producer Price Index clearly show that our current price-hiking problems are more than just a return to normal: PPI for October was almost 21 percent higher than it was in October 2019. In fact, we have had 10+ percent two-year PPI inflation since May:
Again, it is highly probable that the decision by the Federal Reserve’s Open Market Committee to start winding down its Treasury security purchases a month earlier than previously expected, was motivated in large part by these PPI numbers. Producer prices were in deflation for most of last year – hardly surprising – but what is often overlooked is that they fell from May to December in 2019 as well. Since that year was a strong one for the economy, with unemployment below 3.5 percent and workforce participation above 60 percent, PPI deflation is not unique to artificial economic conditions.
As mentioned, the 2019 PPI comparison also shows that we have inflation in our economy that has nothing to do with ending last year’s shutdown. There is another way to capture this point: Table 1 reports inflation as a year-to-date figure. For example, in February this year, producer prices were 2.8 percent higher than they were in January; in March the same prices were five percent higher than in January; and so on.
Measured this way, inflation in October was 17.3 percent. This is the fourth highest October figure for year-to-date inflation on record (and the PPI data goes back to 1913). In fact, 2021 is the second-most inflationary year for producer prices, with only one year, 1917, exhibiting faster acceleration of year-to-date inflation:
Again, year-to-date inflation is not the commonly used measure for price hikes. The year-to-year method is a better one for gauging inflation over the longer term. However, the year-to-date numbers tell us how fast inflation is accelerating, and are therefore important indicators of how potentially destabilizing inflation can be. From this viewpoint, Table 1 has some ominous news for us: every year with a higher October Y-t-D inflation rate was associated with a war. In 1946 we had just gotten out of World War II, and 1916 and 1917 were right up in the middle of World War I. The two real peacetime years with Y-t-D inflation comparable to 2021 are not very good company to have: in 1933 the country was struggling with the Great Depression, and in 1974 stagflation was burning through the economy.
Tomorrow we get the Consumer Price Index data. Prepare for more bad news.