Services are huge, 62% of total PPI. We see parallels to early 2021, when this mess started. But core goods are well-behaved.
By Wolf Richter for WOLF STREET.
The Producer Price Index, which tracks the costs of goods and services that companies buy, dished up another nasty surprise today, but it wasn’t that much of a surprise, but the continuation of a trend of nasty surprises that started in January. It was in a benign downward trend for all of 2023, and it has been in an increasingly nasty uptrend for the past six months. And it’s all driven by services. Prices of core goods are well behaved.
The PPI tracks costs that companies will try to pass on to their customers – consumers, other businesses, and governments. And the part that they’re able to pass on to consumers filters into consumer price inflation. And what it shows is that inflation is now re-gaining momentum beneath the surface of consumer prices.
Because the heat is in services, and because services are huge and account for 62% of overall CPI, we’ll start with services.
Services PPI spiked by 7.0% annualized in June from May, after the 3.8% jump in May, and the 7.2% spike in April, seasonally adjusted (blue in the chart below). These are services that producers use. And producers will try to pass those cost increases on to their customers.
The 3-month rate spiked by 6.0% annualized, the highest since May 2022 (not shown in the chart below).
The 6-month rate, which is slower in picking up the recent moves but irons out the whiplash volatility and shows the trends better, spiked by 4.8%, the highest since August 2022 (red). The 6-month rate has been increasing in a straight line since January, after hitting a low point in June 2023.
So here is a scary thought: March 2021. The six-month rate has now shot past where it had been in March 2021 (+4.3%), when consumer price inflation was still benign (CPI at +1.6% year-over-year but rising), though underlying pressures were building.
We were screaming about it in February and March 2021 because we saw the stunning price spikes in used vehicle auction prices and the big auto dealers bragging about their massive per-vehicle gross profits due to much higher selling prices, which made zero sense and shouldn’t be possible except in an environment where the inflationary mindset suddenly kicks in and inflation goes haywire. And it did. And the services PPI had warned about it months ahead of time. And now the services PPI is turning nasty again.
Year-over-year, the services PPI jumped by 3.5% in June, the worst since February 2023, and up from 3.0% in May. It has been heading higher every month since December, which is now visible at the bottom of the U-turn. It’s now ahead of where it had been on the way up in March 2021 when all this started.
“Finished core goods” PPI is well-behaved. In the consumer price indices, many goods prices have fallen since mid-2022, and the CPI yesterday documented the steepest year-over-year drop in durable goods prices in over 20 years. Inflation is no longer in goods.
The PPI for “finished core goods” includes finished goods that companies buy except foods and energy. Prices have continued to rise, but at a slow pace.
In June, the finished core goods PPI rose by 0.8% annualized. The six-month rate, in June at 2.6% annualized, has been roughly unchanged for the fourth month in a row. There are no major inflation pressures building up in core goods at this point:
“Core” PPI spiked by 5.5% annualized in June from May, seasonally adjusted, after the 3.4% increase in May and the 6.0% increase in April, driven by the spike in services (blue in the chart below). Services dominate the core PPI, which excludes the food and energy components.
The 3-month core PPI spiked by 5.0%, the worst since June 2022 (not shown in the chart below).
The 6-month rate, which lags more but smoothens out the month-to-month squiggles and shows the trends better, spiked by 4.2%, the highest since September 2022. After spending much of 2023 super-well-behaved near the 2% line, the 6-month rate started taking off in February (red).
Year-over-year, core PPI increased by 3.0%, the worst since April 2023. It has been accelerating every month this year, with the bottom of the U-turn in December.
But the low month-to-month readings from August through December 2023 are still holding it down. As the index moves deeper into the second half of 2024, these low readings last year will fall out of the 12-month calculation.
The overall PPI jumped by 2.6% annualized in June from May, the highest since March 2023. The 6-month rate rose to 3.2%, the highest since October 2022.
Year-over-year, overall PPI rose by 2.6%, the highest since March 2023. Below are the year-over-year readings of overall PPI (yellow), core PPI (purple), services PPI (red), and finished core goods PPI (green). You can see the U-turn, driven by services (red), while the finished core goods PPI is well-behaved:
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