Wholesale Prices Rise More than 10 Percent, Pointing to Continued Price Hikes

by
Ryan McMaken
My articles My booksMy videos
Follow on:TwitterLinkedIN

Year-over-year PPI growth came in at over 10 percent for the sixth month in a row. This will put more pressure on the Fed to “do something.”

Original Article: “Wholesale Prices Rise More than 10 Percent, Pointing to Continued Price Hikes”

The US Bureau of Labor Statistics released new Producer Price Index (PPI) data today, and it’s not good news for consumers.

The PPI is a measure of prices at the production phase of goods and services, and is often an indicator of where consumer prices are headed. Prior to 1978, the index was known as the Wholesale Price Index.

This May, year-over-year PPI growth came in at over 10 percent for the sixth month in a row, reaching 10.8 percent. This was a small drop from April’s year-over-year rate of 10.9 percent, but continues to suggest ongoing upward pressure in prices. The month-over-month change for May was 0.8 percent, which was up from April’s month-over-month change of 0.5 percent. Movement remains upward, and from a very elevated base. Year-over-year changes in the PPI have been over 7 percent for twelve months. As with the Consumer Price Index, the narrative among optimistic analysists was that PPI measures would moderate significantly in May and signal a downward turn. That does not appear to be the case so far. Indeed, consumer prices showed few signs of moderating in May, as CPI inflation surged near to a forty-one-year high of 8.6 percent. Continued growth in the PPI points toward ongoing growth in consumer prices as well.

.

Changes, of course were not uniform, and the AP reports today:

 A 1.4% jump in the prices of goods accounted for nearly two-thirds of the rise in the PPI. Goods prices, which rose 1.3% in April, were driven by soaring costs for energy products.

Wholesale gasoline prices rebounded 8.4% after falling 3.0% in April, making up 40% of the rise in the costs of goods. Jet fuel increased 12% after shooting up 14.8% in April. There were also increases in the cost of residential natural gas, steel mill products and diesel fuel.

Wholesale food prices were unchanged after increasing 1.4% in the prior month as the cost of beef and veal fell 9.5%, offsetting an increase in processed young chickens. Excluding food and energy, goods prices rose 0.7% after increasing 1.1% for two straight months.

These numbers will put further pressure on the Biden administration and the Federal Reserve to “do something” about price inflation. It is unclear what this means for the Fed, however, which has signaled it is reluctant to depart from its ongoing policy of extremely timid moves toward slowly ratcheting up the federal funds rate and selling off Fed assets. Rather, the Fed is increasingly behind the curve. It is truly remarkable to have a CPI inflation rate of 8.6 percent while the federal funds rate sits at 1 percent and the Fed portfolio remains near $9 trillion in assets.

The Fed will meet this Wednesday, and the consensus is that the Federal Open Market Committee will raise the target rate by 50 basis points. The Wall Street Journal even reported yesterday that there is growing evidence that the FOMC could raise rates by 75 basis points. If this happens, we’ll be in uncharted territory, since the Fed will then be raising rates just as the S&P500 (a leading economic index) enters a bear market, and as the yield curve is showing signs of inversion and flashing warning signs for a recession. On the other hand, if the Fed elects to do nothing, it will have no room to maneuver as economic conditions continue to worsen. That is, the Fed routinely cuts the target rate by more than 200 basis points going into recessions, but the Fed will be in negative territory if it cuts even 100 basis points, given the current target rate. One could now easily imagine a scenario in which the Fed raises the target rate by one or two percentage points midyear this year only to cut by the same amount later this year. This would follow the Fed’s usual playbook of resorting to easy-money stimulus whenever the economy shows signs of slowing down. The problem the Fed now faces, however, is that price inflation will continue until the Fed truly scales back on its easy-money efforts—which will likely cause a significant downturn.

There is no easy way out. No matter what the Fed does, the economy will still have to deal with the countless malinvestments and bubbles that have sprung up on the back of easy money over the past decade—and which accelerated in 2020 and 2021. Simply raising the target rate won’t make this difficult adjustment go away. We must also acknowledge that the Fed cannot pick the “correct” target rate that will “fix” the economy. The only fix is for the Fed to altogether stop using open market operations to manipulate market interest rates and let the market set prices.

This Audio Mises Wire is generously sponsored by Christopher Condon.

You Might Also Like

Government Spending Is the Real Tax; Deficits Are a Sideshow

2022-05-27

Many economists believe that during an economic slump government should run large budget deficits in order to keep the economy going with increases in government outlays, with the consequent budget deficit giving individuals more disposable money.

Forget What the “Experts” Claim about Deflation: It Strengthens the Economy

2022-05-09

For most experts, deflation is bad news since it generates expectations for a continued decline in prices, leading consumers to postpone the purchases of present goods, since they expect to purchase them at lower prices in the future. Consequently, this weakens the overall flow of current spending and this, in turn, weakens the economy.

What Determines Interest Rates? Comparing Mainstream Economics to the Austrian School

2022-05-06

The conventional view among mainstream economists, as presented by Milton Friedman, is that three factors determine market interest rates: liquidity, economic activity, and inflationary expectations. In this viewpoint, whenever the central bank raises the growth rate in the money supply by buying financial assets such as Treasurys, this pushes the prices of Treasurys higher and their yields lower.

It’s Mid-2022 and the Fed Has Still Done Nothing to Fight Inflation

2022-05-04

It was last August when Jerome Powell began to admit that inflation just might be a problem. But even then, he was only willing to say that inflation would likely be “moderately” above the arbitrary 2 percent inflation standard. Back in August, low inflation—not high inflation—was still perceived to be the “problem.”

The Economic Sanctions against Russia Are Destructive and Counterproductive: We Must Oppose Them

2022-04-30

The Western sanctions against Russia seem to shock very few Westerns. Yet, for several reasons, these sanctions should at least be the subject of lively debate in Western societies. Firstly, these sanctions are illegal from the standpoint of international law (only the Security Council can approve economic sanctions, according to article 41 of the Charter of the United Nations).

Economic Aspects of the Pension Problem

2022-03-08

On Whom Does the Incidence Fall? Whenever a law or labor union pressure burdens the employers with an additional expenditure for the benefit of the employees, people talk of “social gains.”

Behind Klaus Schwab, the World Economic Forum, and the Great Reset: Part 2

2022-01-29

Bob continues his series on Klaus Schwab, explaining the WEF’s plans for redesigning the world, and providing quotes from Schwab’s book on the fourth industrial revolution.

Andrew Moran: NBA skills trainer on Tim Hardaway Jr work ethic & Starting team Hardaway in Miami

2022-01-27

In this segment, Andrew talks about Tim Hardaway Jr work ethic, reviving his career in Dallas, and building Team Hardaway in Miami which gives local kids an opportunity to travel the country and play basketball.