Producer Price Increase Doubles Expectations in January

Federal Reserve Chairman Jerome Powell “retired” the word “transitory” as it relates to inflation back on Nov. 30. Just two-and-a-half months later, we’re seeing a new word bandied about to describe inflation — persistent.

Less than a week after the January CPI data came in even hotter than anticipated (again), we got yet another signal that persistent is a much better word for the inflation situation. Producer prices (PPI) doubled expectations, charting the biggest increase in eight months.

This underscores what Peter Schiff said during a recent interview on Fox Business – the inflation tsunami is just getting started.

The PPI for final demand surged 1% month on month. The annual increase in producer prices came in at 9.7%, just off the record set in December. Core PPI, excluding food and energy, rose by 0.9% on the month and charted a 6.9% annual gain – also just off the record.

The monthly increase in consumer prices blew away Wall Street estimates of just 0.5%. The estimate for the 12-month PPI had been 9.1%.

Wholesale goods prices rebounded 1.3% after teasing us with a 0.1% dip in December. A 0.8% rise in the prices of goods excluding foods and energy accounted for more than 40% of the broad increase in the costs of goods.

Reuters called this “another sign that high inflation could persist through much of this year.”

There’s that word – persist.

There is good reason for concern. 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. 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.”

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.

“PPI offers a window to the price pressures that businesses are facing, and which will likely be passed on to consumers in the way of consumer price inflation in the months to come,” PNC economist Kurt Rankin wrote.

The much higher than expected CPI and PPI data for January has increased the urgency for the Federal Reserve to “do something.” Citigroup Chief US economist Andrew Hollenhorst told Reuters that the data now supports a50 basis point rate hike in March.

This is further evidence of persistent and increasingly embedded inflationary pressure that should keep the Fed leaning towards even more hawkish policy.”

But as Peter Schiff has said during his Fox Business interview, a half-a-percent rate hike is not hawkish in the face of 7.5% inflation (accepting the government’s cooked CPI number).

If we still measured inflation the way we did 40 years ago, it would be 15%, not 7.5%. And the rate hikes they’ve proposed are completely inadequate. In fact, the Fed is intending to pursue an accommodative monetary policy. Even if they raise interest rates to 1 or 2%, that is highly accommodative. That’s the same type of interest rates they had when inflation was below 2%. You’ve got inflation at 7.5%, even the way they measure it – and rising. The only way to put out this fire is to have positive real interest rates. The Fed needs to get above the inflation rate. We’re not even going to get close. So, they’re going to continue to pour gasoline on the fire. And so, the entire time the Fed is inching up rates, inflation is actually going to be moving higher. Inflation is going to be worse in 2022 than it was in 2021, and real interest rates are going to continue to fall even as the Fed raises nominal rates.”