Inflation nightmare keeps getting worse: Producer prices erupt. Inflationary rules of thought

Services PPI and Core PPI spike.

By Wolf Richter for WOLF STREET.

The producer price index for final demand rose by 1.4% in March from February and by 11.2% from a year ago, both the largest and worst increases in year-on-year data dating back to 2010, the Bureau of Labor Statistics today. After being stuck at around 10% for four months in a row, producer price inflation has now broken out – to use a stock trading designation.

PPI’s final demand tracks the input prices of consumer-oriented industries, whose sales prices will be picked up in future months by the consumer price index, which yesterday, WHOOSH, already reached 8.5%. PPI’s final demand shows what awaits CPI in the coming months. And there is no “softening” in store, and that is the PPI for services that has now started to rise.

In the last 15 months, producer prices have risen relentlessly. Five months in a row with double-digit producer price inflation is some of it. And the eruption today is remarkable.

Excluding volatile food and energy costs, the core PPI rose by 1.0% in March from February and by 9.2% year-on-year, the highest in the data, after pushing up relentlessly since the end of 2020:

And services! The producer price index for final demand services increased by 0.9% in March from February and by 8.7% year-on-year, the highest in the data back to 2010.

What companies along the entire supply chains have found is that they can pass on cost increases to the next business and to consumers. And consumers have been eager to play along, having switched from being fairly smart buyers and price buyers to paying anything. It is the inflationary mindset that has taken over.

This inflationary mindset suddenly blossomed and flourished due to two enormous unprecedented factors:

  • The Fed’s ruthless monetary policy with interest rate repression and $ 4.8 trillion in money laundering triggers huge inflation in asset prices and the purchasing power it throws off;
  • The government is spreading $ 5 trillion in borrowed money across the country in just 24 months.

Under this stream of money leading to the most grotesquely overstimulated economy ever, price no longer matters and everyone has figured it out.

Price increases are moving across the economy in uneven waves, with the cost of some goods and services rising, while others may be stable or perhaps even falling, and a month or two later the prices of other goods and services rise in a game of inflation Whac – A mole.

And companies have found that not only can they pass on the higher costs, but under the guise of the now booming inflationary mindset, they can roll over much more than the extra costs, leading to huge fat margins.

Companies always charge the maximum price they can, limited only by their desire to reach their sales goals. When price resistance among their customers sets in, companies consider whether to pull back these price increases to stimulate volume, or keep raising prices further until some kind of ceiling is hit. With online purchases, this equation is now recalculated in real time and constantly.

What has changed compared to 2019 is that buyers are now infected with the inflationary mindset and are now able and willing to pay anything, instead of pushing back. That setback puts a damper on price increases – and thus on broader inflation. But that setback has now been broken from consumers and up all the way up the supply chains. The whole price dynamic was unleashed.

We have seen that a ceiling is now being hit in used cars, where prices have risen by 40% and buyers’ resistance has set in, and sales volume across the industry is now declining despite plenty of supply. But in other products and services, buyers’ resistance has not yet been met. And even if the price of one product hits resistance, the price of another product breaks loose.

And these double-digit increases in producer prices show that even higher inflation is heading towards consumers and will continue to do so until consumers begin to retreat, either because they are no longer able to or because they are no longer willing to pay anything. It’s far from happening, and those trillions of dollars are still floating around out there with state and local governments, businesses, and consumers, and they will be used, though that consumption may shift to different categories, such as from goods to services.

Enjoy reading WOLF STREET and would you like to support it? I use ad blockers – I understand why – but do you want to support the site? You can donate. I really appreciate it. Click on the beer and ice tea mug to find out how:

Would you like to be notified by email when WOLF STREET publishes a new article? Sign up here.

Leave a Comment