More Inflation Coming Down the Pike; Producer Prices Up Big Again

In another sign that the inflation train is far from running out of steam, producer prices were up big again in February.

The Producer Price Index (PPI) for final demand surged 0.8% month on month. This was close to the expectation. The annual increase in producer prices came in at 10%, tying the all-time record.

And this has nothing to do with Russia. The February PPI data did not capture the price increases in oil and other commodities after the Russian invasion of Ukraine.

Stripping out food and energy, core PPI was up 0.2%. This was below expectation but still a healthy month-on-month increase. The core number is important to analysts because food and energy prices are considered more volatile. But for the companies paying the cost, it doesn’t matter if the increase was driven by energy or other inputs.

This news comes on the tail of another big increase in consumer prices. The Consumer Price Index in February was up 7.9% on an annual basis. The continuing spike in producer prices will likely spill over into CPI down the road, meaning consumers will see more price hikes in the months ahead as businesses pass on at least some of their costs to customers.

Consumer prices typically lag behind producer prices. Looking at the data over the last year, there is a large gap between the prices producers are paying and the prices consumers are paying. Despite the left-wing spin blaming price gouging “greedy corporations” for inflation, companies generally have been slow to raise prices as fast as their costs. That means you’re likely going to be on the hook tomorrow for at least some of the price pressures businesses are feeling today.

During a podcast last fall, Peter Schiff warned that surging producer prices likely signaled consumer prices would continue to rise in 2022.

I believe the producers are going to look to recoup what they lost in 2021 in 2022. But it’s not that prices are going to stop going up in 2022. They’re going to keep going up. It’s just that producers will be more likely to not only pass on the full extent of those price increases, but to catch up on the price increases that they should have imposed in 2021 but held off on because they were hoping that what they were witnessing was transitory.”

Peter’s not alone in this assessment. PNC economist Kurt Rankin called the PPI an early warning sign of what households can expect in terms of consumer price inflation in the coming month.

The message is clear that consumer prices have several months of exceptional gains ahead of them still, despite the fact that the Fed is set to begin hiking its policy rate in March and continue to do so throughout the year.”

And the Fed’s battle with inflation is going to be a feckless fight. It’s unlikely the central bank will be able to raise rates throughout the year without popping the bubbles it blew up with two years of money printing. That would almost certainly blow down the house of cards economy. And even if the Fed does follow through with multiple rate hikes without wrecking the economy, the 2.5% interest rate projected for 2023 won’t likely slay 7.9% price inflation.

This is why Peter Schiff told Tucker Carlson that inflation only has one way to go. Up.

If we use the same CPI today that we used then, we would be over 15% inflation, which means 2021, or 2022, right now, this is the worst inflation in our lifetimes. We’re experiencing higher inflation now than anything in the 1970s. And this decade is just getting started. Inflation’s got only one way to go and that’s up.”

Early on in this inflation spike, a lot of businesses appeared reluctant to pass on price increases to their customers because they believed the “transitory” inflation narrative. There was fear that competitors might not match price increases. The strategy was to eat the price hikes for a few months, ride out the transitory inflation storm and then move on. But with the transitory narrative dead and buried, there is nothing to stop businesses from passing their rising costs on to their customers.

In other words, don’t expect any relief from rising prices any time soon.