Supply Chain

Weekly Stat: Will PPI Continue to Predict Rise in Overall Inflation?

Price pressures continue for many goods- and services-producing sectors of the U.S. economy.
Weekly Stat: Will PPI Continue to Predict Rise in Overall Inflation?

On fourth-quarter earnings calls, anecdotal evidence clearly showed the prices of many goods and services produced by U.S. businesses were outpacing consumer inflation.

For example, packaged food company Conagra Brands endured quarterly gross inflation in the double digits. In early January, CFO Dave Marberger raised the company’s inflation forecast for the fiscal year ending May 30 to 14% from 11%.

Product scarcity, freight delays, and an extreme labor shortage are pushing up costs for nearly all industries.

The producer price index (PPI), shown in the chart above, measures inflation from the perspective of costs to industry or producers of products. For example, it captures data on capital equipment prices for manufacturers, and prices for construction services and unprocessed foodstuffs.

Investors like the PPI statistic because the data comes from a large basket of producers and encompasses about 100,000 price points, according to Sebold Capital. 

Some see PPI as an earlier predictor of overall inflation than consumer measures like the personal consumption expenditures (PCE) index. Costs pressures hit businesses first, the thinking goes, then companies raise the bill for consumers.

Our chart of the 12-month changes in the core PPI (which excludes food, energy, and trade services) and core PCE doesn’t reveal that relationship. But it does show some businesses face higher inflation rates than consumers do.

The core PPI number for January was 6.9%, continuing the trend. Core PCE numbers for January are due out on February 25.

One thing to note about producer price inflation is that global supply chain difficulties have contributed to the supply-demand mismatch that fuels higher prices. Researchers at the St. Louis Federal Reserve Bank found that durable goods sectors relying heavily on international suppliers were the most impacted by supply chain disruptions (and higher prices) in 2021.

Indeed, this week Walmart said it held a  “competitive advantage” over other businesses because it sources more than two-thirds of products domestically. Walmart also has the balance sheet to absorb higher costs for labor, shipping, and fuel. 

Many other retailers and other industries don’t have that luxury. So if the snags in supply chains get worked out, will the PPI measures start dropping? We’ll see.