US Price Inflation in at 13.2%

A Close Look at CPI and PPI

The US Consumer Price Index (CPI) data for September was just released Wednesday. Unfortunately, it continues to rise like a mountain to the moon. This index in particular reflects an average of prices paid in the city, measured against 1983 as a basis point starting at 100. In other words, prices on average show to be 174% higher than that of 1983 (with a September index of 274). By this measure, $1 in 1983 is equivalent in purchasing power to roughly $2.75 today.

If we zoom in to the start of 2019, we can better see the changes happening with respect to current events.

You’ll notice that prior to the Covid-19 madness, this CPI index in January 2020 was at ~259. There is a dip shortly thereafter as a result of the lockdowns and general panic. A year later, that index increased to ~262, a 3% increase for that year (Jan-to-Jan). As of September 2021, the CPI increased 15% (274 - 259). And lastly, if you look at the monthly change from August to September (274.1 - 273.0), there is a 1.1% increase. This equates to an annualized price inflation of 13.2% (1.1 x 12). This is significant.

Note that this index is calculated by averaging price changes with weights representing their importance. In other words, there is subjectivity of these numbers by the Bureau of Labor Statistics (BLS). These numbers are also seasonally adjusted, meaning the effects of seasonal changes, such as weather, school year, production cycles, and holidays, are suppressed (again a bit of subjectivity by the BLS).

Now let’s look at the Producer Price Index (PPI). September data was just released this morning. It too shows as a mountain to the moon.

PPI is a measure of prices from the perspective of the producer (as opposed to that of the consumer for CPI). A rise is producer’s costs will naturally get passed on to consumers. Hence in looking at the PPI, we get a feel for what we will see on the consumer end down the road.

The above PPI measure is with respect to commodities at final demand. Final demand means that the index reflects the wholesale price paid for commodities (sold as personal consumption, capital investment, to government, and as exports). Compare this with intermediate demand which reflects a price paid for goods, services, and construction products sold as inputs to production (excludes capital investment). Some commodities can be purchased by both final and intermediate demand buyers. Lumber, for example, is purchased for personal consumption but, it is also purchased as input to businesses for further production purposes.

Like the CPI, the PPI is seasonally adjusted and is subjectively calculated using weightages assigned to commodities based on their relative importance.

A nugget of historical information: The PPI is measured against the year 1982 as a basis. Up until 1978, producer prices were tracked as the Wholesale Price Index (WPI). In 1982, the BLS reset the measurement and redefined it as PPI. The PPI is calculated in the same way as the WPI, but it includes the prices of services (in addition to goods) and eliminates the component of indirect taxes from prices.

So let’s get down to the nitty gritty. What do the latest PPI numbers tell us? Well, the September index came in at 128.9. Compared to the index in January 2020 at 119.2 (prior to Covid), this is a 9.7% increase. If we look at the monthly change from August 2021 (128.2) to September 2021 (128.9), we see a monthly increase of 0.7%. This equates to an annualized price inflation rate of 8.4%. Also a significantly high number.

Let’s look at this PPI in a different format: percent change from a year ago.

Last month showed a 10.2% increased as compared to September of 2020. The trend is certainly not good.

Even by the government’s own numbers, price inflation is starting to become a serious worry to Americans — even for those that took comfort in the assurances of political leaders that this phenomenon is only “transitory.” This is nonsense. Look at those charts and ask yourself to find the historical transitory periods of price inflation.

Raphael Bostic, president and CEO of the Federal Reserve Bank of Atlanta, begins to break ranks with the transitory talking point just earlier this week, saying,

“It is becoming increasingly clear that the feature of this episode that has animated price pressures — mainly the intense and widespread supply chain disruptions — will not be brief. Data from multiple sources point to these lasting longer than most initially thought. By this definition, then, the forces are not transitory.”

Of course, he doesn’t mention anything to the cause of these supply disruptions. No mention of the inflationary monetary and fiscal policies pursued by the Fed and US government. Jeff Deist gives us a reminder of how both Congress and the Fed went bananas beginning under Trump in March of 2020,

“The Fed pumped more than $9 trillion to its primary dealers, estimates are that more than 20 percent of all US dollars ever issued were issued in 2020 alone. On the fiscal side, more than forty federal agencies have spent $3.2 trillion in covid stimulus spending. So that is $12 trillion of inflationary pressure introduced to our economy.”

Janet Yellen, US Treasury Secretary, is still holding the line on the talking point,

“I believe it’s transitory, but I don’t mean to suggest these pressures will disappear in the next month or two.”