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Producer Prices at the Intermediate Level Rising Even Faster, What Does It Portend?

At the stage 2 intermediate level, producer prices are up 28.05% from a year ago.
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PPI Final Demand, Intermediate Demand, CPI YOY 2021-11

PPI Synopsis 

  • Stage 1: 20.79%
  • Stage 2: 28.05%
  • Stage 3 20.60%
  • Stage 4 12.87
  • PPI Final: 9.62%
  • CPI: 6.81%

At the intermediate stages, producer prices are rising much faster than PPI for final demand. In turn, the PPI is rising much faster than the CPI.

What does that say about future passthrough? Lets' hone in for another look.

PPI Final Demand, Intermediate Demand, CPI YOY Detail

PPI Final Demand, Intermediate Demand, CPI YOY DETAIL 2021-11

No Leading Indicators

There does not seem to be any clear leading indicators. In April of 2020 the PPI at all stages bottomed before the CPI but only by a month and with no other instances. 

The period from June 2021 to September 2021 is interesting in that the CPI declined slightly while PPI for final demand jumped and the intermediate levels were mixed. 

Overall, the intermediate stages are more volatile in both directions than the PPI for final demand which in turn is more volatile than the CPI.

Same Direction, Different Amplitudes

Mostly, these measures all move in sync with no predictive value. 

I often hear people saying things like "It's only a matter of time before there is a passthrough from intermediate to the CPI" but there is no discernable CPI lag other than a random month here or there. 

The prices tend to move together albeit with far different amplitudes. 

PPI Notes 

The final demand portion of the FD-ID system measures price changes from the producer perspective for commodities sold as personal consumption, capital investment, to government, and as exports. The system is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services excluding trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes from a producer perspective for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. The system includes two parallel treatments of intermediate demand. The first treatment organizes intermediate demand commodities by type and is composed of six main price indexes: unprocessed goods for intermediate demand; processed goods for intermediate demand; intermediate demand trade services; intermediate demand transportation and warehousing services; intermediate demand services less trade, transportation, and warehousing; and intermediate demand construction. The second treatment organizes intermediate demand commodities into production stages, with the explicit goal of developing a forward-flow model of production and price change.

These indexes can be used to study price transmission across stages of production and final demand. This system is constructed in a manner that maximizes forward flow of production between stages, while minimizing back-flow of production. The production flow treatment contains four main indexes: intermediate demand stage 1, intermediate demand stage 2, intermediate demand stage 3, and intermediate demand stage 4.

PPI Components 

Just for gins I took a deep dive into PPI Components. There are tens of thousands of them, and also replicated in multiple ways. For example there are different numbers by stage. 

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The Excel tables are enormous, and there are lots of them. I condensed one of the tables with over 5,500 lines to smaller number of items using the BLS's primary categories.

PPI Percentage Weights Unprocessed Goods Intermediate

PPI Percentage Weights Unprocessed Goods Intermediate

Somehow processed foods and feeds is a category of unprocessed goods. 

PPI Percentage Weights Processed Goods Intermediate

PPI Percentage Weights Processed Goods Intermediate

PPI Percentage Weights Services Intermediate

PPI Percentage Weights Services Intermediate

The bottom 15 BLS Services are all under one percentage point in weight 

As an example of the captured detail, please note the weight of "Great Lakes-St Lawrence Seaway Water Transportation of Freight" is 0.013% of the services PPI.

Real estate services are over 7% of the services PPI, portfolio management is 2.8%, commissions from sales of insurance is 3.3%, and investment banking adds 1.4% to the PPI.

Question of the Day

How much time, energy, cost, and people are involved in capturing and quantifying this data?

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