If YoY “PPI is less than CPI, producers do not feel under pressure to make cost (i.e., payroll) cuts”

“Producer price declines are ‘less good’ than consumer price declines, and on net that’s ‘bad‘”

 – by New Deal democrat

I pay a lot less attention to producer prices than to consumer prices. Partly that is because in the past few decades, the PPI has tended to be coincident with the CPI rather than leading it, and partly because so long as the YoY PPI is less than CPI, producers do not feel under pressure to make cost (i.e., payroll) cuts.

Which means unfortunately that since the start of the Iran war I’ve had to pay more attention to the PPI release.

And that continued with June’s release this morning — because, while it was “good,” at a decline of -0.3% for the month, it wasn’t *as* good as the -0.4% CPI decline. In other words, there’s a net +0.1% further pressure on producers. Here’s what the monthly change in CPI (blue), PPI for final demand (gold), and PPI for commodities (red, /2 for scale) which declined -1.2%, look like:

Of more concern is that while the YoY measure of final demand producer prices also declined slightly to +5.6%, it remains higher than the 3.5% YoY for CPI in June:

Although it hasn’t been a uniform rule, as this historical graph shows, when the YoY% increase in PPI exceeds CPI, more often than not that spells trouble:

Breaking down final demand between goods (red) and services (gold), for the month for former declined -1.2%, while the latter increased 0.2%:

Unsurprisingly on a YoY basis producer prices for goods (red) tend to be more more volatile than for services (gold):

But what is of concern in this breakdown is that the PPI increase for final demand services has been 4.6% or higher YoY for the past few months, higher than any such reading aside from the immediately inflationary post pandemic period, and briefly in the summer of 2024 

This strongly suggests that there is strong underlying inflationary pressure that has gone well beyond energy related prices. It also confirms what we have seen for a number of months now in the regional Fed indexes: widespread price increases in inputs, which are only incompletely being based on to buyers downstream.

And with the war flaring up again, it seems very unlikely that there will be another benign month for inflation when July’s numbers are crunched.

Last month I concluded in part:

“Faced with a spike in price for inputs, producers can either absorb the increases, pass them on to consumes, or some of each. The regional Fed indexes for the past few months have indicated rampant input price hikes, with much – but not nearly complete – pass-throughs to consumers. That seems to be what we are seeing in the comparison of producer and consumer price spikes so far.”

If producers stay squeezed, they are going to begin to make cost cuts where they can. And if what I read elsewhere yesterday is true, that as much as 1/2 of all consumer spending recently has been due to the stock market’s wealth effect, the continuing economic expansion is considerably more fragile than it might appear on the surface.