Business Update: Prices Continue to Climb…Even for the Government

Different Inflation Effects for Different Groups

Inflation isn’t uniform across the economy. Instead of envisioning it as a steady increase, think of it like ocean tides crashing against a rugged shore—some areas are affected sooner than others.

For instance, the recent uptick in inflation over the last three months has caught some by surprise. The government has reported that the final demand producer price index, which reflects prices that U.S. businesses receive, went up by 1.1% in May for the second consecutive month. Year-over-year, prices have climbed by 6.5%. Some might say 2022 feels a bit reminiscent of past inflation problems.

Looking at consumer data, the personal consumption index saw an increase of 1.1% for the month, showing an acceleration from April’s 0.8% rise. Over the year, personal consumption grew by 5.9%. Notably, commodity prices jumped by 3.5% in May and 11% over the year. But if you exclude energy, the monthly growth drops to 0.3%, slightly down from April’s 0.4%, while the annual rise falls to 2.9%.

In the services sector, prices have also shown significant growth, with a 0.4% rise month-over-month and 4.5% year-over-year. A notable contributor to this is the category labeled “Portfolio Management.” It’s a bit unusual—calculated by multiplying the fees charged by fund managers by the value of the managed assets. Essentially, as the prices of financial assets increase, so does the cost of managing those portfolios, even if the percentage fees stay the same. This doesn’t quite reflect typical household inflation. Excluding this factor, our analyses suggest that prices for personal consumption services rose about 0.25% in May, equating to a year-on-year increase of 3.8%.

This aligns closely with the consumer price index (CPI) for services, which rose 3.5% over the last year. When you take out energy services, service prices increased by 0.3% for the month and 3.4% for the year.

Government Experiences Higher Inflation

The government sector has felt an even stronger impact from inflation, with prices for all goods and services purchased by federal, state, and local governments rising 2% in May. This follows increases of 2.1% in April and 2% in March, culminating in a 10.6% annual rise.

The cost of private sector services for the government also went up by 0.5% in May, following a 1% rise in April and a 0.3% rise in March, translating to a 5.9% increase over the year.

Commodity prices saw a 4.0% rise in May, building on a 3.8% increase in April and 4.6% in March. Year-over-year, prices of goods bought by the government rose by 1.79%. Much of this inflation is driven by energy costs; the government paid 11.6% more for energy in May, which adds up to a staggering 57.6% increase over the year. If you disregard food and energy, government goods inflation would decrease to 1% for the month and 5.6% annually.

This inflation rate is still higher than what is indicated by private consumption and the CPI. For example, consumer prices increased by 0.8% from April to May. When you strip out food and energy, consumer prices actually fell in May, with just a 1.1% annual increase.

The ongoing conflict with Iran is contributing to rising energy prices, and defense procurement costs have significantly surged as well—with a 2.6% increase in May and rises of 3.4% and 3.2% in prior months, leading to a 14.7% increase overall year-on-year.