PPI: Now That’s a Problem


This isn’t going to be good.

The Producer Price Index for final demand advanced 0.6 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a rise of 0.5 percent in March and a decline of 0.1 percent in February. On an unadjusted basis, the index for final demand moved up 2.1 percent for the 12 months ended in April, the largest 12-month advance since a 2.4-percent increase in March 2012. (See table A.)

In April, the 0.6-percent increase in final demand prices can be traced to the indexes for final demand services and final demand goods, both of which also advanced 0.6 percent.

The apologists are going to come out of the woodwork on both Obama’s policies, Congressional policy and Fed policy with this report, but if you listen to them you’re a fool.  There are some stark warnings in this report and they’re not in the headline number, or in the final PPI series either.

But they’re present, and if you’re one of the Obama apologists for big deficits were necessary to rescue us from a depression camp I will make a prediction here: The odds are rising rapidly that you’re not just wrong — you’re fucked over the next 12 months and forward.

Let me explain; we’ll start with the final demand table.

OK, now let’s drill this down.  Energy on a final-demand basis was not up much at all.  Food was up huge, and people will dismiss the headline 0.6% (monthly, which would be a 7.4% annual inflation rate!) on food, which of course doesn’t “hit” core.

There’s a problem with that however — services were up the same 0.6% monthly behind an 0.7% increase last month, and “core” is up 0.3% on goods, which is a 3.7% rate of increase.  This pushed the 12 month rate beyond the Fed’s 2% target.

The next claim that will be made is that this is “transitory.”  Unfortunately the intermediate (~1-3 months forward) and crude (~3-6 month forward) numbers tell a very different story.

The intermdiate trend in foods is bad news; that is a monthly change.  Energy has been the counterbalance the last two months on an intermediate term, and has kept things in check, and “less foods and energy” has been reasonably-behaved — right up until this year.  Now it’s looking less-so.  But the alarm bells are not there, they’re in the forward trend on the crude side.

Here’s the problem — we’re several percent ahead of last year’s rate at this time of the year.  Spring into early summer tends to have a PPI increase in crude goods.  But if that spread continues we’re going to have a major problem coming into the fall as this works through the system, and given unit labor costs and productivity numbers (both going the wrong way too) there is no ability to absorb it.

Now let me point out that we’re not quite where you have to ring the “oh crap” bell yet.  There’s another month or two before that happens — but by June, if the trend we’re seeing here hasn’t broken this will get into the forward economic analysis mindspace of most of the people who look at this stuff.

I don’t like the trend at all.

But before you ring the “heh Denninger has turned into an inflationist!” bell let me put one final dollop of cold water on your insanity — no, I have not.  There is no ability in the economy to absorb such price increases as productivity and unit labor cost figures have shown.  Instead, what this will produce is recession — deep recession.

That “flat” GDP print is going to be revised to negative, and we’re now odds-on to print negative for second quarter too.

That’s the formal definition folks.

The Market Ticker

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