Free Markets, Free People

Looking at the PPI

Today’s release of the Producer Price Index raises some interesting and scary questions. The core PPI was up only 0.1%, but a 1.2% increase in good prices and a 0.5% increase in energy prices brought the overall PPI up by 0.4%.

Now, the reason that food and energy are excluded from the core PPI and CPI is that they often show a lot of monthly volatility. Those prices simply rise and fall quickly, so, on a month-to-month basis, they may not mean much. Ultimately, however, a trend of price increases in, say, energy will trend to raise prices across the board, as that increases the cost of production.

The traditional Keynesian argument about inflation is that it tends to decrease when the economy is struggling, as aggregate demand is stifled. Sadly, in the 1970’s we learned that simply wasn’t true, and the existence of stagflation sent the Keynesians back to the drawing board for about 15 years to reformulate a Neo-Keynesian economic model. Essentially what happened in the late 60’s and early 70’s was that the Fed pursued a very accomodative monetary policy. Ultimately, even a slow economy couldn’t prevent that monetary expansion from showing up as inflation.

Sound familiar?

It should, because the housing boom was kicked off by a similar policy, and since the collapse, the Fed has pursued a policy of “quantitative easing”, i.e., buying $1.2 trillion of securities with hastily printed money. Overall, the monetary base has more than doubled over the past two years, also, as the Fed has kept short-term interest rates at 0%.

So, I guess the question is whether today’s PPI is just a monthly outlier due to the volatile sectors, or whether it’s a sign that monetary expansion is beginning to kick off an inflationary spike that will soon begin to show up in the CPI as real, noticeable inflation.

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10 Responses to Looking at the PPI

  • I am almost getting to the point where I wish we had a TEMPORARY military dictatorship who would hunt down all the Keynsians and shoot em.  Almost.

    What the fark more has to happen to disprove that horrible crock of crap?

  • By the Way, In one year I have made $8,140. in appreciation from my 20 oz’s of gold. Of course this is just on paper, I don’t realize it until I sell the gold. And I don’t think it is going down in price anytime soon. Wish I would have had more cash on hand last year to buy even more gold.  Right now I am pinching pennys to buy a little silver every week. I think Silver will be the next big growth metal as the price of Gold begins to escalate even more. People will be looking for more hedges against inflation.

  • Door number two.
    Oil is priced in dollars. Much of international trade is priced in dollars. (US/Japan, US/China, US/Korea) When the value of the dollar goes down, all those prices have to go up. Or the sellers have to eat the cost differential. I came of age in the 70s and I’m getting a distinct Back to The Future vibe from all this. Unfortunately, we’re not going back to 1955 or 1985. We’re going back to 1975.

    • I was born in 1978, so I can’t answer this question. How would you compare the energy around the Reagan candidacy vs. the current Tea Party energy?

      I’m curious because conservatives have periodically roused themselves throughout my lifetime, but the rachet has always been in the liberal’s favor. I’m trying to assess whether the Tea Party is another periodic arousal which has about a five month timespan left in it or if we may actually reverse the ratchet this time. (Because at this point a mere periodic arousal is only going to buy us a couple more years, if we don’t reverse the rachet we’re really toast.)

      • I will answer your question. It is not the same thing at all.  The Reagan wave was fueled partly be disgust of both the failure and arrogance of Carter, and a rebellion against the Republican establishment that had defeated Reagan four years earlier. In that respect it was similar to today.

        But The current wave is one of anger and is not being led by any individual. It is more like a desperate, starving  mob storming the palace with pitchforks and torches.

        Reagan, on the other hand gave us leadership, and hope, he channeled the anger into a positive message of optimism.  I don’t know how to explain it. But you can still get a slight feel for it if you watch one of his old televised speeches. 

        But to hear him in person was almost magical.  He had an aura around him. He exuded optimism and confidence.

        The closest thing I have seen to that is Chris Christie.  I heard one of his speeches and he has a bit of the same thing Reagan had.

    • Even trade between non-US countries is done in USD. Chinese companies quote prices in USD to Korean customers, etc. China has been having inflationary pressure including wage pressures. I bet that will show up eventually too.

  • I is not just gold that is up.   Silver has appreciated even more.  I saw an article on Bloomberg this morning talking about the oil producing countries wanting $100 oil to offset the falling dollar.  Just about all the commodities are rapidly escalating.
    We are likely to see “currency wars” as countries try to push down the value of their currency to help their exports.  But, not everybody can have a currency advantage.  We have the Fed moving toward QE2 (which is just printing money) and also telling us 1.5% inflation is not enough and they want 2.5%.  I am afraid they will let these cats out of the bad and then have no idea how to get them back in the bag.  Stagflation, here we come.
    We now have capital controls in the US.  That is always what a government in trouble does.  I did see this morning that,  in spite of all the attempt at controls, Swiss Banks saw a net $50 billion inflow last year.  There is a large interest in capital preservation right now.  Before trashing the money, government always claims they want to collect taxes that are being evaded.

  • The stagflation of the 70’s was also fueled by the step increase in oil prices and subsequent transfer of American wealth to OPEC.  Since energy is the master commodity, nflation didn’t subside until two things happened.

    1)  Better government (ie government that HELPED rather than screwed up, aka Reagan)

    2) the dollar was devalued so that the price of oil better matched its utility for the economies of the world