Alan's Alert 7-14-2021

 

The Producer Price Index (PPI) was released this morning and it came in at 1.0% month-over-month.  This blew the forecast of 0.6% out of the water.  The Core PPI (the PPI without food or energy), forecasted at 0.5%, also came in at 1.0% month-over-month. 

 

Here’s the summary from the Bureau of Labor Statistics (BLS):

From the BLS report, “On an unadjusted basis, the final demand index moved up 7.3 percent for the 12 months ended in June, the largest advance since the 12-month data were first calculated in November 2010.  Nearly 60 percent of the June advance in the final demand index can be traced to a 0.8-percent increase in the prices for final demand services.”

 

If you want to see what a new all-time high in year-over-year PPI looks like, the Fed has one for us:

So, why does this matter?  The PPI is different from the CPI (Consumer Price Index) in that it measures the costs from the producer’s perspective rather than the consumers.  Even though producers’ costs are increasing, they don’t always pass those on to the consumer.  That’s why there are two indexes.  If a producer is in a very competitive industry, they may absorb the cost of rising inputs in order to stay competitive.  This would put downward pressure on their profit margins.  It makes for a very tricky situation.  Producers could raise prices on consumers and possibly drive them away, or they could not pass those costs on and struggle to stay profitable.

If you wanted to do get fancy with the charts, you could subtract the producer price index from the consumer price index to see what this “eat the costs” versus “raise prices” dynamic looks like.

  

From a producer’s perspective, this is not sustainable.  Costs at the consumer level are going to have to rise.  Businesses will only be able to tolerate this for a short period of time.

 

Since the BLS has changed the way they calculate the PPI over the years, we can’t see what this would have looked like prior to November of 2010.  Fortunately, I’m a total nerd when it comes to all things finance and math.  I dug into the archives of the Fed and have made the following chart:

 

This is “Final Demand: Finished Goods” subtracted from the CPI.  As you can see, we are looking at levels not seen since the 1970s.

 

So, what is Fed Chair Jerome Powell going to do today at the Financial Services Committee hearing.  Is he going to stick to the script and announce all is well, nothing to see here or will he start talking about the need to taper and spook the market?  His prepared remarks were released here and it doesn’t look like he is going to waver.  He states, “monetary policy will continue to deliver powerful support to the economy until the recovery is complete”, that the jobs market is “a ways off” and that “substantial further progress” is needed before a taper of asset purchases will begin.  I linked the webcast of the hearing above.  It kicks off at 9AM pacific time.  Don’t expect fireworks, this committee is run by Mad Maxine Waters.  She knows how to ask dull questions and not rock the boat.  I’ll be tuning in but that’s because I’m a geek for this stuff.