The ruling media has no idea what the PPI measures…
There is growing evidence that the economic factors that slowed the pace of price growth in the first half of last year have subsided.
The Ministry of Labor said on Friday: Producer Price Index (PPI) for final demand Compared to the previous month, it fell by 0.1%. Compared to a year ago, PPI rose by just 1%.
At first glance, this looks like good news regarding inflation. As I expected, The Keizai Shimbun reported only the first glance. And they ignored details showing that the era of disinflation is over and the risk of higher inflation is increasing.
Dow Jones MarketWatch: “PPI shows wholesale inflation has declined for third straight month, indicating inflation is slowing in the economy's pipeline.” declared.
“U.S. wholesale inflation fell last month, showing price pressures are still easing,” Associated Press declared.
These headlines are wrong from the start. PPI is not a measure of overall inflation. Nor is it a measure of “the price a company pays before selling to a consumer,” the business reporter said. new york times put it on friday.
The PPIs referred to in these headings are formally referred to as: Producer price index relative to final demandor PPI-FD For short. is a measure of the price received. domestic producers of goods and services; For personal consumption, capital investment, government use, and export. It is not a measure of wholesale price, nor is it a measure of the amount a business pays for a product or service before selling it to a consumer.
of producer price Part of the name of this measure is Changes in price are measured from the perspective of sellers of goods rather than buyers.. That is, it does not include sales or excise taxes or government subsidies paid to consumers. Shipping charges paid by the consumer are also excluded. The value of imported goods is not included because they are received by foreign producers rather than U.S. producers.
of Consumer Price Index (CPI)On the other hand, we measure prices from the buyer's perspective. Consumption tax and subsidies are also included. Imported goods are included because households pay for imported goods. CPI does not include prices paid by federal, state, and local governments.
of final demand The name of this measurement derives in part from the fact that what is measured is the so-called “selling price.” user. That is, it is not a sale of components or materials used directly to create goods or services sold to consumers.these are products sold to customers government buyers, household buyers, businesses purchasing capital goods, and foreign buyers.
On the other hand, what the Department of Labor calls a “target set” of goods and services included in the PPI. Total market output of US producers, the set of goods and services covered by the CPI are those purchased by U.S. households for consumption. Thus, while the PPI is broader in some ways, including some goods and services sold by domestic producers that are excluded from the CPI, it is narrower in other ways, since they are manufactured abroad. does not include some goods and services purchased by U.S. families.
the important thing is, There is no particular relationship between PPI's main final demand figures and wholesale prices.. The confusion is that this index was once officially wholesale price index. However, this has always been a misnomer, as the index never focused on wholesale prices.and changed Back in 1978.
This isn't a big secret.Ministry of Labor website I'll explain this (emphasis added):
The Wholesale Price Index (WPI) was the name of the program from its inception in 1902 until 1978, when it was renamed the Producer Price Index. At the same time, the emphasis was shifted from one indicator covering the entire economy to an SOP system consisting of three main indicators covering the production stages of the economy. By changing its focus, the BLS has minimized the double-counting phenomenon inherent in commodity-based composite indexes. In 2014, PPI transitioned from the SOP method to the FD-ID method. The FD-ID system extends the coverage of the primary aggregate index beyond the SOP system by adding prices and weights for services, construction, government purchases, and exports.
The name change from the Wholesale Price Index to the Producer Price Index did not involve a change in index methodology, and the continuity of price index data was not affected. The name change reflects the theoretical model of the output price index underlying the PPI. (look BLS Working Paper 44, “On the Theory of Industrial Price Measurement: Output Price Indices.”) Additionally, the term wholesale price index The index was misleading in that it never measured price changes in the wholesale market. No indexes have been discontinued as a result of terminology changes or analytical emphasis.
It is simply incorrect to describe PPI as a wholesale price or the price paid by a company. There are metrics including wholesale margin (not wholesale price) that are reported deep within the PPI report, which we'll talk about in more detail later, but that's only part of the picture.
It's probably going too far to ask the Associated Press and other establishment media outlets to correct 45 years' worth of reporting. But perhaps someday they will stop making this mistake every month.maybe someone can warn me disinformation police and start the process.
…and they don't even understand what they're saying about future inflation
The other end of those headlines is also misleading. PPI data does not suggest price pressures are easing or that pipeline inflation is decreasing. Quite the opposite. The data shows that disinflation has lost momentum and inflation is at best stalled or even trending upward.
According to the Ministry of Labor, the decline in PPI-FD was caused by a 0.4% decline in final demand goods prices. Almost 60 percent of the decline in commodity prices was due to demand for 1.2 percent of final energy. Energy prices are highly volatile and exposed to geopolitical risks, as oil and gas prices soared on Friday after the US and UK launched missile attacks on the Houthis overnight. , its decline should not be interpreted as a sign of future disinflation.
Moreover, almost all analysts agree that disinflation due to supply chain repair following the disruption caused by the pandemic is nearing an end. We cannot expect further disinflation on the financial side of the economy.
In other words, if the inflation rate continues to decline, Disinflation should come from the services side.. December statistics show that his PPI-FD for all services remained flat for the month, making it the third consecutive month that this index has remained unchanged. However, inflation in core services rose sharplydefined as service prices minus measures of energy, food, and wholesale and retail margins. trade services.
It's worth stopping for a moment and considering trade services A little deeper.index of final demand trade services Measures the change in margins received by wholesalers and retailers. Governments use margins as a measure of the prices wholesalers and retailers charge for services such as displaying and marketing goods and services. This is because these prices are not directly observable. Over the past five months, this margin has been shrinking; greedy flationist They want to blame inflation on corporate greed. Did retailers and wholesalers simply become less greedy in the second half of last year?
The part of the PPI that examines inflationary pressures in the so-called “pipeline” is divided into: intermediate demandabbreviated as PPI-ID, is widely ignored by the financial media, which claims that Pipeline exists. final demand. Intermediate indices primarily measure the prices of goods and services (excluding capital goods) sold to businesses, and those prices are used in the production of goods and services for businesses. final demand. In other words, intermediate demand index This is pretty close to what the economic press mistakenly thinks. final demand index teeth.
The data here shows an increase of 0.2%. Core intermediate demand processed products And the upward trend that has been going on since July involves higher increases and shallower declines. Some of the basic building blocks of growth, such as steel, power, and fabricated metals, rose significantly. Cold-rolled steel sheets and strips rose 14.6%. Core unprocessed goods for intermediate demand also rose 0.2%.
So the disinflationary pressures in the commodity pipeline are: Everything comes from energy prices.
PPI also has a price index. intermediate demand services. The index rose 0.4% in December, the largest increase since July's 0.6% rise. More than 80% of the rise was due to a 0.5% rise in core prices in the service sector, excluding trade, transportation and warehousing. The background to this is the progression of serious service inflation.
The message from the PPI report confirms what we learned from Thursday's Consumer Price Index. Disinflation is over. At best, inflation has remained high and there are signs that it could flare up again.
