Producer Price Index in August, the potential fallout from the CPI

M/M PPI per Bloomberg consensus, base slightly higher. In m / m, q / q and y / y horizons.

Figure 1: Annual producer price inflation (final demand) on a monthly basis (in blue), quarterly (green), on an annual basis (red), %. NBER marked peak-to-trough slump dates shaded in grey. Source: BLS, NBER, and author accounts.

Figure 2: Annual core inflation (final demand) on a monthly basis (final demand) (blue), quarterly (green), on an annual basis (red), %. NBER marked peak-to-trough slump dates shaded in grey. Source: BLS, NBER, and author accounts.

Is the PPI driving the CPI? Some pictures.

Figure 3: Quarterly consumer price index (blue), final producer price index (brown),%. NBER marked peak-to-trough slump dates shaded in grey. Source: BLS, NBER, and author accounts.

Figure 4: Quarterly CPI (in blue), core PPI finished goods (brown),%. NBER marked peak-to-trough slump dates shaded in grey. Source: BLS, NBER, and author accounts.

It’s hard to tell if the PPI is driving the CPI in any reliable way, just by looking at the pictures (and in any case, it’s important to remember that the CPI includes services, while these PPI measures only cover final goods) . From my August 2021 post on CPI and PPI:

Is the core CPI the US producer price index? Clark (1995) presents a skeptical view that PPI provides additional methodological predictive power.

Some analysts predict that recent increases in the prices of raw and intermediate goods will pass through the production chain and generate higher consumer price inflation. While simple economics suggests that such a pass-through effect is likely, more complex and careful thinking in creating PPI and CPI data suggests that any pass-through effect may be weak. In line with this more complex analysis, empirical evidence also shows that the production chain weakly links consumer prices to producer prices. PPI changes sometimes help predict CPI changes but fail to do so systematically. Therefore, recent increases in some PPIs do not in themselves portend a rise in CPI inflation.

Caporale and others. (2002) uses a formal multivariate approach to conclude that for the G7 economies, the PPI drives the CPI. It remains to be seen if these results are still relevant to the current environment (and the use of updated versions of the PPI).

In my April post, I noted mounting evidence that Granger PPIs cause CPI, in a sample that includes the epidemic.

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