Producer price inflation entrenches at 10%, worst level in data

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Firms are convinced that they can pass on higher, more certain prices to consumers.

By Wolf Richter for WOLF STREET.

The producer price index for final demand tracks input prices for consumer-facing industries whose producer prices are then followed by the consumer price index which, WHOOSH, reached 7 .9% in February, the worst since 1981. Today the Bureau of Labor Statistics released final demand PPI for February, which jumped 0.8% in February from January, and 10.0% compared to a year ago.

This is the fourth month in a row that producer price inflation has reached around 10%, and the four months were by far the worst in data dating back to 2010 (red line). And that still doesn’t include the spike in fuel prices following Russia’s invasion of Ukraine. It’s yet to come.

Excluding food and energy input costs, “basic” producer prices rose 0.2% for the month and 8.4% from a year ago, now in the 8 range, 5% for the third consecutive month. This includes final demand for services, which grew 7.8% year over year (green line):

The fact that the final demand PPI is now stuck at around 10% for four consecutive months shows that producer price inflation is entrenched at historically high levels.

Some components will rise while others will fall in a whac-a-mole inflation game, especially in the volatile food and energy commodity-based components. But the persistence of this double-digit PPI inflation is something, compared to previous periods.

Businesses that have to pay these higher prices will pass them on to consumers and other businesses. Passing on higher, more certain prices is now all the rage, and everyone knows it, and everyone does it, because consumers are always ready to pay anything, and companies are also ready to pay because that they know they can pass on these higher costs.

And these double-digit producer price increases will put further upward pressure on consumer prices going forward.

Over the past two years, the Fed has missed every good opportunity to end its money-printing spree, shrink its balance sheet, and start raising short-term rates, before going that far. Instead, he did everything he could to stoke inflation and created ridiculous excesses in asset prices, which have now started to collapse.

The Fed is meeting today and tomorrow and will decide to do far too little, far too late, to stage the sort of soft landing that it could have staged 20 months ago. Now inflation has become a raging fire across the board, including with producer prices, and the Fed is trying to find a way to pump less gas into the fire right now. Read… Why This Is The Boldest Fed Ever, And What I Think The Fed Should Do To Reverse And Mitigate The Effects Of Its Policy Mistakes

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