Energy Dominates Modest Producer Price Pressures

By Robert Hughes

In the discussion of prices and inflation, attention usually focuses on the Consumer Price index (CPI) or the Fed’s preferred measure, the Personal Consumption Expenditure (PCE) price index.  They are designed to measure consumer prices. The Producer Price Index (PPI) from the Bureau of Labor Statistics (BLS) is a much more comprehensive report covering goods and services for consumers as well as businesses at various stages of production.

The headline number from the report is the PPI for final demand, goods and services meant for final consumption. That measure rose 0.2 percent in February and is up 2.2 percent from a year ago. The goods portion rose 0.3 percent for the month while  the services portion rose 0.4 percent.

Among final goods categories, energy is the largest contributor to price increases, rising 19.2 percent from a year ago. Excluding energy, final goods prices are up 1.3 percent. On the opposite end of the spectrum, food prices are down 1.8 percent from a year ago. Excluding both food and energy, prices of final goods are up 2.0 percent from a year ago. Finished consumer goods excluding food and energy was unchanged for February and up 2.2 percent from a year ago. This measure tends to be higher than the CPI or PCE measures for core consumer goods because it excludes imports.

Prices for business capital equipment fell 0.1 percent in the latest month and are up just 0.7 percent for the year.

Among services, prices for final services rose 0.4 percent in February and 1.4 percent from a year ago. Within the services category, prices for trade services rose 0.9 percent from a year ago and prices for all other services rose 1.6 percent.

The last major component for final demand is construction. Prices for final construction fell 0.1 percent for the month and are up 1.2 percent from a year ago.

At earlier stages of production, energy prices are the largest driver of price increases. Processed energy goods for intermediate demand are up 18.1 percent from a year ago while unprocessed energy materials are up 57.9 percent.

Processed materials for intermediate demand excluding energy are up just 2.7 percent over the past year while unprocessed materials (crude goods) excluding energy rose 4.8 percent.

Intermediate services rose 0.5 percent in February and are up 2.0 percent for the year.  However, most of the gain came from the transportation industry, likely indirectly reflecting higher energy prices. 

The key take-aways from all these numbers are: Energy prices, directly and indirectly, are the biggest driver of price pressures across the economy. Energy prices are extremely volatile and nearly impossible to predict. Furthermore, energy prices have receded in recent weeks so some of the price pressure may reverse soon. Some other commodity prices are also rising but nowhere near the extent of energy. Most other prices including capital equipment and the less energy intensive private services remain generally moderate.

Rising wages may begin to push these numbers higher but imports and faster productivity have the potential to offset faster wage growth.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.