August Producer Price Index

Wholesale prices stagnated according to the latest data from the Bureau of Labor Statistics’ (BLS) Producer Price Index (PPI).  After advancing 0.4 percent and 0.1 percent in June and July respectively, the headline tally was unchanged in August.  The BLS recently reformatted the way this report is configured, adding services, construction costs, export prices, and a bit more to the mix, thereby expanding and subsequently relabeling the old crude, intermediate, and final goods categories.  Thus in this latest report, we see our economy was split as an uptick in service costs was offset by a price decline in goods.

The new category “Final Demand Services” was up 0.3 percent in August.  A miscellaneous component that subtracts out trade, transportation, and warehousing costs from that figure caused most of the rise, accounting for 80 percent of the uptick.  Price increases from the transportation and warehousing providers themselves contributed to the rest of the monthly gain.

Prices for “Final Demand Goods” dropped 0.3 percent in the period.  This segment was primarily influenced by the two most volatile components within the indicator, food and energy.  Food purveyors paid 0.5 percent less than a month earlier for their supplies.  Energy sank 1.5 percent in August, the second consecutive monthly decline, having fallen in six of the last seven months.

In this new PPI format, definitions of the earlier stages in the production of goods have been expanded and service costs added.  On the “goods” side these used to be referred to as crude and intermediate phases of production; services weren’t even included.  The new “processed goods for intermediate demand” category dropped 0.3 percent as foods & feeds fell 0.8 percent and energy dropped 1.7 percent.  Without these two components, this “core” intermediate stage rose by 0.2 percent.  The earliest stage, “unprocessed goods for intermediate demand,” collapsed 3.3 percent in the period, and is now 0.8 percent cheaper than a year earlier.  For services, the earlier stage ticked up 0.2 percent in the period, and by 1.6 percent in the past 12 month.  Interestingly, 60 percent of this increase is attributed to the prices of business loans which surged 2.1 percent in August.

Notwithstanding the efforts of the Federal Reserve to boost the economy by creating money out of thin air, inflation is not manifesting according to the producer price measure.  This indicator has remained at or (mostly) below 2.0 percent on a year-over-year basis since March 2012.  This slow rate of change in producer prices should help the central bank justify zero interest rates well into 2015, even if their lower bound is not producing the Federal Reserve’s desired effect.       (by C. Cox)