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PPI update

The August headline Producer Price Index came in per expectations (0% change for the month), while the core PPI came in a bit lower than expectations (0.1% vs. 0.2%). On the surface this sounds good, but from a longer term perspective, as the chart above shows, we are likely still in a rising inflation environment.

Over the past three months, the core PPI has risen at a 3.4% annualized rate, which puts it well above the range of 1993-2007. And as I have noted repeatedly over the past year or so, when both core and headline measures of inflation rise at the same time, it is a good indication that monetary policy is accommodative. When money is tight, then increases in food and energy prices force other prices lower. When money is easy, all prices can rise. Plus, it is significant that inflation can be as high as it has been in recent years despite the economy's agonizingly slow recovery and its huge output gap; only easy money can explain that.

This next chart shows the index itself, plotted on a semi-log scale so that the slope of the line equates to the rate of change. I've divided the past 50 years into several different inflation regimes: the early 60s, when inflation was extremely low and stable; the period from '66 through '73, when inflation pressures started to build; the '74-'82 period when a plunging dollar, soaring commodity prices and a Fed that couldn't figure it out pushed prices up 9% per year on average; the '83-'03 period, when the Fed successfully tamed inflation and kept it relatively low; and the past six years, when first Greenspan and then Bernanke started using monetary policy to "stimulate" the economy. Inflation since 2003 has been running at least double what it was during the Fed's golden years (1983-2003).

Note also that even though inflation has been relatively low and stable since 1983, the level of producer prices has risen by a total of 88%—almost double. Moreover, the CPI has increased 131% over the same period. Just a few percentage points a year can really add up over time.

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