Buckle your seatbelts — the next few months will remain bumpy for consumers. The producer-price index for February hit a new series high, rising 10% over the past year and portending more escalation in the consumer-price index ahead. The Bureau of Labor Statistics reports that both good and services escalated significantly, with the PPI hike for goods driven by rapidly rising energy costs:
The Producer Price Index for final demand increased 0.8 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 1.2 percent in January and 0.4 percent in December 2021. (See table A.) On an unadjusted basis, final demand prices moved up 10.0 percent for the 12 months ended in February. In February, the advance in the index for final demand can be attributed to prices for final demand goods, which rose 2.4 percent. The index for final demand services was unchanged. …
Final demand goods: Prices for final demand goods jumped 2.4 percent in February, the largest advance since data were first calculated in December 2009. Two-thirds of the broad-based increase can be traced to an 8.2-percent rise in the index for final demand energy. Prices for final demand goods less foods and energy and for final demand foods also moved higher, 0.7 percent and 1.9 percent, respectively.
Product detail: Nearly 40 percent of the February increase in prices for final demand goods can be attributed to the index for gasoline, which rose 14.8 percent. Prices for diesel fuel, electric power, jet fuel, motor vehicles and equipment, and dairy products also advanced. In contrast, the index for fresh and dry vegetables decreased 9.4 percent. Prices for beef and veal and for hot rolled steel sheet and strip also moved lower. (See table 2.)
Final demand services: Prices for final demand services were unchanged in February after a 1.0-percent increase in January. In February, a 1.9-percent rise in the index for final demand transportation and warehousing services and a 0.2-percent advance in margins for final demand trade services offset a 0.4percent decrease in the index for final demand services less trade, transportation, and warehousing. (Trade indexes measure changes in margins received by wholesalers and retailers.)
The road might get bumpier in the near term, in fact. The rapid increase in PPI was even more pronounced in the prices for goods and services already in the pipeline:
Within intermediate demand in February, prices for processed goods rose 1.6 percent, the index for unprocessed goods jumped 14.6 percent, and prices for services were unchanged. (See tables B and C.)
Processed goods for intermediate demand: The index for processed goods for intermediate demand increased 1.6 percent in February after climbing 2.0 percent in January. Leading the broad-based advance in February, prices for processed energy goods rose 7.4 percent. The indexes for processed foods and feeds and for processed materials less foods and energy moved up 1.9 percent and 0.1 percent, respectively. For the 12 months ended in February, prices for processed goods for intermediate demand jumped 23.3 percent.
Product detail: Over 40 percent of the February increase in prices for processed goods for intermediate demand can be attributed to a 14.9-percent rise in the index for diesel fuel. Prices for gasoline, primary basic organic chemicals, commercial electric power, nonferrous metals, and prepared animal feeds also advanced. In contrast, the index for hot rolled steel sheet and strip fell 16.0 percent. Prices for natural gas to electric utilities and for beef and veal also declined.
Unprocessed goods for intermediate demand: Prices for unprocessed goods for intermediate demand moved up 14.6 percent in February, the largest increase since rising 17.4 percent in January 2001. Ninety percent of the broad-based advance in February can be traced to a 32.3-percent jump in the index for unprocessed energy materials. Prices for unprocessed foodstuffs and feedstuffs and for unprocessed nonfood materials less energy also moved higher, 3.0 percent and 1.4 percent, respectively. For the 12 months ended in February, the index for unprocessed goods for intermediate demand climbed 35.1 percent.
Product detail: Over two-thirds of the February advance in prices for unprocessed goods for intermediate demand can be attributed to a 65.1-percent jump in the index for natural gas. Prices for crude petroleum; slaughter hogs; hay, hayseeds, and oilseeds; nonferrous scrap; and slaughter cattle also increased. Conversely, the index for raw milk decreased 8.7 percent. Prices for carbon steel scrap and for nonferrous metal ores also moved lower.
Yikes. The only saving grace is that it might have been worse. Rick Santelli notes that investors expected it to be worse, especially on “core” PPI. The overall expectation was 0.9%, and 0.6% excluding food and energy. Even though, as Santelli explains, it’s still not much of a miss — and most people experience this through food and energy costs anyway:
Steve Liesman focuses on the intermediate PPI for a reason. Oil prices have fallen sharply after rising quickly in the wake of the Russian invasion of Ukraine, a move that should impact some (but not all) of the energy-price impacts of the last couple of weeks. The counterargument to that, which Liesman also notes, is that oil prices are returning to a status quo ante which drove the numbers in this report. About the best we can expect from the decline in oil prices back to the mid-February level is that the March PPI report won’t look even worse when BLS publishes the numbers four weeks from now.
The rapid escalation in PPI and its portents for CPI acceleration puts even more pressure on the Federal Reserve to act. Fed chair Jerome Powell already signaled a 0.25% increase in the base interest rate, but that’s not going to be enough. Now the question becomes how quickly the Fed will get to the next interest-rate hike:
The harder part of Fed officials’ deliberations might be agreeing on how to signal the likely path of rate increases in the months to follow. Worsening inflation, already at a 40-year high, could force them to accelerate the process, but they have signaled they are trying to move carefully to avoid triggering a sharp correction in financial markets.
Mr. Powell told lawmakers earlier this month that, because of the market upheaval triggered by the war in Ukraine, he wanted to avoid adding to uncertainty and to start with a traditional, quarter-point increase rather than opt for a larger, half-percentage-point move. That larger step has been advocated by a couple of his colleagues in recent weeks and some financial-market commentators who say the Fed needs to remove its stimulus faster to demonstrate its seriousness to tame inflation.
Mr. Powell earlier this month laid the groundwork for the possibility of raising rates by 0.50 percentage point, or 50 basis points, later this year. He also suggested the Fed might need to eventually raise rates to a level designed to deliberately slow economic growth.
Why focus on the next hike when the first hike has yet to happen? Powell’s signal on the opening-bid hike has been clear enough that markets have already priced it into their calculations, and … it’s not exactly having an impact:
The economic outlook has already forced a rapid shift among officials’ expectations of how soon and fast they will need to raise interest rates. Even though the Fed hasn’t actually raised rates, communications about its plans have sent up borrowing costs across the economy for everything from business loans to credit cards to mortgages. The average 30-year fixed-rate home loan stood just below 4% last week, according to Freddie Mac, up nearly a full percentage point since the start of the year, and it climbed higher in recent days.
“From a policy-maker point of view, there is at this point no need to shock the economy or shock markets,” said Greg Daco, chief economist at EY-Parthenon, a global consulting company.
That assessment may have to change too, especially with Joe Biden and his administration dodging any responsibility for inflation. In fact, both Biden and Pelosi still want Congress to pass massive off-budget spending bills that would require even more rapid monetary expansion, exactly the opposite of what the Fed wants to do with its interest-rate hikes. The Fed also counted on supply chains to have been fully restored by now, which the Biden administration has largely fumbled to this day and which will be even more problematic with China’s latest COVID-19 shutdowns.
Faced with that level of ineptitude in this administration, the Fed has no other way to deal with inflation except by rapidly escalating the base interest rate. Powell may not like that reality, but he can either grapple with it now or wait for a few more CPI and PPI reports to make the point more obvious.