You’ve heard of the consumer price index, right? You should know about the producer price index too. It’s a Bureau of Labor Statistics report that also measures inflation, but at the wholesale level.
Wholesale inflation was 0.4% on a month-to-month basis in November, compared to 0.3% at the retail level. The PPI is the less popular sibling of the CPI, and here’s a way to look at the difference.
You go to the grocery store, you pick up a carton of eggs, you take a glance at the price — up 54% year over year — and you put them right back down because oh my God, they are so expensive.
That’s how we see inflation, and that’s what the consumer price index measures. But what we see isn’t the whole picture. Businesses see a whole other world of inflation.
“If we think about manufacturing, it could be things like inputs, like copper or the chips that go into the computers,” said Scott Helfstein, head of investment strategy for Global X, an exchange-traded fund company. “If we think about restaurants, that could be something like the staff and their employment costs.”
Now why might we care about a price that we can’t see? Because those costs roll downhill.
“Well, with the price increases for producers, they’re going to pass those on to consumers in the months to come,” said Kurt Rankin, a senior economist with PNC Financial Services Group.
“Think of oil prices. When oil prices rise, we see that immediately at the gas pump. But we might not see that immediately for plastics that might be manufactured from that oil,” he said. “Then, eventually, the retailers have to pay more to stock those items and they pass those price increases on to the people buying them.”
The producer price index captures all this, and that’s why we care — it’s kind of like a Ghost of Christmas Yet-to-Come situation.
November’s PPI numbers were complicated. “The services component actually dropped slightly, but the goods component moved up,” said Bob Murphy, a professor of economics at Boston College.
Prices in the services world — think barbershops, health care, restaurants — have been the hardest to control, so the fact that inflation is slowing down there is good news.
And the fact that goods inflation perked up isn’t necessarily something to worry about yet, mostly because goods inflation has been low to nonexistent for the past year. Putting these numbers together, what does it all mean?
“This provides a little more legs for inflation, for a month or two or three, but is not something that’s going to be sustained,” Murphy said.
So inflation probably will fall further, but it might take a while.
