From Reuters today:
U.S. producer prices accelerated in June, leading to the largest annual increase in more than 10-1/2 years, suggesting inflation could remain high as robust demand fueled by the economy’s recovery from the COVID-19 pandemic strains the supply chain.
The report from the Labor Department on Wednesday followed on the heels of news on Tuesday that consumer prices increased by the most in 13 years in June. There are, however, signs that inflation is close to peaking. Underlying producer prices rose at a moderate pace on a monthly basis in June.
Here’s the CPI against the PPI (finished goods).
Figure 1: Month-on-month annualized inflation rate for CPI for all urban consumers, goods and services (blue), and for PPI for all finished goods (pink), %. Source: BLS and author’s calculations.
And here is the the core counterpart (note I’ve drawn the Y-axes to be the same scale in both graphs).
Figure 2: Month-on-month annualized inflation rate for CPI for all urban consumers, goods and services ex-food and energy (blue), and for PPI for all finished goods ex-food and energy (pink), %. Source: BLS and author’s calculations.
Do PPI’s lead CPI’s in the US? Clark (1995) provides a skeptical view that PPI’s provide additional systematic predictive power.
Some analysts project that recent increases in prices of crude and intermediate goods will pass through the production chain and generate higher consumer price inflation. While simple economics suggests such a pass-through effect may occur, more sophisticated reasoning and careful consideration of the construction of the PPI and CPI data suggest any pass-through effect may be weak. Consistent with this more sophisticated analysis, the empirical evidence also shows the production chain only weakly links consumer prices to producer prices. PPI changes sometimes help predict CPI changes but fail to do so systematically. Therefore, the recent increases in some producer price indexes do not in themselves presage higher CPI inflation.
Caporale et al. (2002) uses a more formal multivariate approach to conclude that for G-7 economies, PPI’s do lead CPI’s.
Interestingly, even though the PPI surprised on the upside (while PPI core matched expectations), the 5 year inflation break even declined.
Figure 3: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW, all in %. Source: Fed via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 7/7, and author’s calculations.