PPI and CPI

October 14th, 2016 11:39 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

The PPI was firmer than I had expected in September, rising by 0.3% total and 0.2% core (in both cases, one tenth above consensus and two tenths above my estimates).  As you know, there are few categories where the PPI numbers correlate well with the current month’s corresponding CPI figures, but this report is worth discussing a little anyway.  First, wholesale food prices were firmer than I had anticipated in September, rising 0.5% after falling by more than a full percentage point in both July and August.  It appears that the slide in food commodity prices (fruits and vegetables, meats, dairy, etc.) may be winding down.  For most of these categories, the CPI results tend to lag the PPI figures by a month or two, so this does not necessarily have significant implications for the September CPI but it could be meaningful in October and beyond.  Second, when the core PPI is higher than expectations, I typically look to the “wholesale trade services” and “retail trade services” categories, which account for nearly a quarter of the core (and gauge profit margins of wholesalers and retailers, which are NOT prices, but that is a rant for another day!).  However, in September, retail trade services fell by 0.9% so that the combined contribution of these two categories to the core was a full tenth lower than I had expected.  This means, of course, that for the rest of the core (i.e. the pieces that actually measure prices rather than profit margins), the results were three tenths higher than I had anticipated.  The breakdown points to some real price pressure bubbling up.  Prescription drugs prices surged yet again, a phenomenon that is highlighted regularly in the newspaper.  Apparel prices increased again at the wholesale level, which is a telltale sign that the deflationary impact of the past appreciation of the dollar has fully worn off.  There is a long list of other categories, both goods and services, that posted significant advances in September.

None of this makes much of a difference for the September CPI.  I still look for a 0.3% increase in the headline figure, driven by a seasonally adjusted rise in gasoline prices.  Meanwhile, the core CPI may have advanced by 0.2% last month.  I don’t have anything crazy going on in my core CPI forecast, but steady rises in many of the services categories mean that 0.2%’s, not 0.1%’s, will be the norm going forward.  Education costs may have rebounded in September after coming in flat in August (with a rare outright decline in seasonally adjusted tuition).

There are also a handful of services categories within the core PCE deflator where the BEA uses the PPI figures instead of the CPI numbers.  All in all, these PPI figures pointed to pretty firm inflation readings for the corresponding PCE results.  Hospital charges are likely to be up, airfares appear to have rebounded on a seasonally adjusted basis, and the cost of investment services appears to have firmed.

In sum, today’s PPI numbers do not dramatically impact the immediate future (i.e. next Tuesday’s CPI release) much, but they are consistent with the notion that price pressures are beginning to accumulate and suggest that the consumer price readings may continue to be firm going forward.  As I have noted, I suspect that the year-over-year PCE deflator figures, both headline and core, and going to get very close to 2% by the end of 2016.

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