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.
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.