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PPI update

The November PPI was in line with expectations, and didn't show anything unusual. As the chart above shows, the pace of headline PPI inflation has moderated a bit—it's up at only a 3% annualized pace over the past three months—but core PPI inflation has picked up a bit.

With this chart of the actual producer price index, I'm trying to show the bigger picture. The y-axis is plotted on a logarithmic scale so that rates of growth become easier to appreciate. Note the huge 9% annualized growth in the 1970s, followed by the 1.7% annualized growth in the 1980s and 1990s; that's a dramatic statement about just how inflationary monetary policy was in the 1970s and how well Volcker and Greenspan were able to arrest that inflation. In the past 8 years, however, the pace has picked up again, with inflation posting a 3.7% annualized growth rate, double the rate of the preceding two decades. Inflation is far from being a menace, but it has definitely picked up. The Bernanke Fed can not claim to have done a very good job delivering price stability.

The chart above shows the same pattern, only it focuses on intermediate goods, and uses a 10-yr rolling annualized return. Inflation has clearly picked up in the past 8 years, and I note that this same measure is up 15% over the past year. Moving further up the production pipeline, the PPI crude materials measure of inflation has risen at a breathtaking 9.6% annualized pace over the past 10 years, which translates into a 150% increase in prices. From this I conclude that it's premature to view the moderation of the overall PPI in recent months as a precursor to a more moderate inflation regime.

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