Producer Prices Surge Again in August

Producer prices came in hot again in August, charting the biggest annual gain in nearly 11 years. This indicates “transitory” inflation isn’t going away any time soon.

The PPI for August rose 0.7% month-on-month. Economists were forecasting a 0.6% rise. This follows on the heels of two straight months with producer prices increasing 1.0%.

Year on year, producer prices are up 8.3%. The last time we saw a year-on-year increase at this level was November 2010.

Increasing prices for services were the biggest drive pushing PPI higher. Service prices have lagged durable goods prices. As we reported earlier this month, “real” spending on services rose 0.6% month-on-month in July and was up 7.6% year-over-year. Despite the improvement, it remains 3.1% below pre-pandemic levels. That means service prices still have plenty of room to run up. According to WolfStreet, this shift in spending from goods to services does not bode well for the future trajectory of inflation.

The continued sharp increase in spending on services, after they’d gotten hammered last year, points at the next source of inflation pressures. Services dominate consumer spending, unlike durable goods such as used vehicles, sofas, or electronics, and they weigh much more in the inflation indices, and as prices of services begin to rise, they will impact overall inflation and core inflation measures much more than durable goods.”

Trade services increased 1.5% in August. This measure changes in margins received by wholesalers and retailers, and it accounted for two-thirds of the broad rise in services. Goods prices last month jumped 1.0% after climbing 0.6% in July, with food rebounding 2.9%.

Transportation and warehousing prices exploded, up by 2.8% month-on-month.

Mainstream analysts blame supply chain bottlenecks for the continued rise in producer prices. According to an economist quoted by Reuters, “Supply chain bottlenecks have persisted longer and more intensely than most predicted at the beginning of this year, and widespread labor shortages are among the main input issues producers are dealing with.”

This certainly contributes to the problem, but the mainstream continues to ignore the bigger driver of inflation – the Federal Reserve. It continues to create inflation at breakneck speed. Despite taper talk, the Fed continues the “emergency” monetary policy it initiated at the beginning of the pandemic. Virtually every week, the Fed balance sheet expands to a new record level, as the central bank pumps billions into the economy.

Whether caused by supply chain problems, Fed policy, or some combination of the two, the continued rise in producer prices undercuts the “transitory” inflation narrative.

So far, the CPI has lagged the PPI. Many producers have dragged their feet when it comes to passing on their higher costs to their customers. They’ve bought into the transitory inflation narrative and thought if they could just hold out, their costs would come back down. But it’s becoming increasingly clear that these price increases are forever. As the transitory inflation narrative continues to unwind, more companies will likely begin passing on these higher costs to their customers.

And if companies don’t eventually pass on their rising costs, it will crush corporate earnings.

Meanwhile, the stock market is basically ignoring this data and surging to new highs.

In a podcast last month, Peter said no matter how the Fed responds to these rising prices, it doesn’t bode well for the economy.

If the rising costs ultimately are passed on, which I believe they will, well then that is going to mean consumer prices are going to be rising much faster, which will accelerate, in theory anyway, the Fed’s tightening cycle. So, however you want to look at increases in producer prices, if they don’t pass them on to consumers, it’s bearish for stocks because margins go down and earnings go down. If they do pass on the increases, it should also be bearish for stocks because that means higher inflation at the consumer level, which means the Fed is going to be tightening more, which is also going to be bearish for stocks. So, either way, it’s bearish for stocks. Yet stocks don’t care, and they go up anyway.”