No Demand, No Problem: Inflation Pressures Surge

Businesses expect their input prices to jump by 4.6% in 2017.

“Activity in the region’s service sector held steady”: that’s how the New York Fed today introduced the December results of its Business Leader Survey, which covers the region’s service sector. “Steady” in this case means a negative 0.6 in the diffusion index of Business Activity, where everything below zero indicates that conditions deteriorated over the past month.

The last time the Business Activity index was positive was in July. It has been negative for much of the time over the past 12 months. In the current survey, 27% of respondents reported that conditions improved over the month, and 27% said conditions worsened.

And this is happening in the thriving service sector in the New York Fed’s district (State of New York, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico, and the US Virgin Islands).

In the chart below, the Current Conditions index (blue line) indicates whether the reality, as businesses are experiencing it, is improving or deteriorating. Now at -0.6.

The Expected Conditions index (black line) is the six-month outlook – which is nearly always a lot more optimistic than the current reality; it spiked 18 points to 41.2, though that’s still lower than in March 2015, when it had jumped to 54, at a time when the Current Conditions index had edged down to -0.7:

Another component, the Business Climate index spiked 20 points to -3.8, as the report put it, “signaling that respondents generally continued to view the business climate as worse than normal, though to a small degree compared with recent months.”

The Business Climate index has been negative since September 2007 when businesses in the New York Fed’s district were starting to figure out that something was up. It deteriorated from there into the Financial Crisis, bottomed out at -88.5 in February 2009, and has remained negative ever since, except for one tiny moment in January 2015:

The report on the service sector in the New York Fed’s district was this sort of mixed bag. But what I want to focus on are the inflation measures. People often think that inflation – as in consumer price inflation or wholesale price inflation – is a result of strong demand and a healthy economy, and that there cannot be any inflation when demand is lousy.

But that’s not the case. Inflation can increase, and sharply so, for a number of reasons other than demand. Inflation expectations have something to do with it. That’s why they’re tracked in so many ways. A separate report released today by the New York Fed, the Supplemental Survey Report, sheds some additional light on businesses’ inflation expectations for 2017: they’re jumping.

Respondents in the service sector reported that their prices paid in 2016 already rose 4.1%, and those in the manufacturing sector reported that their prices paid rose by 4.0%. In December a year ago, they’d reported that prices paid in 2015 had increased 3.5%.

And for 2017, they expect prices paid to increase by about 4.6%.

Among the major categories, employee benefits were the biggest culprit in 2016 in actual prices paid. In 2017, they’re expected to soar 7.7% for the service sector and 6.5% for the manufacturing sector. Liability insurance, fire insurance, and other types of insurance are next, with an expected increase of 4.2% and 3.4% respectively. But expectations of wage increases “remained fairly subdued,” at 3.5% and 3.8% respectively, followed by outside services, energy, and other commodities. All of these percentage increases are higher than the increases in 2016. That’s the acceleration of inflation for businesses.

And this is how these business leaders in the service and manufacturing sectors expect prices paid to change in 2017:

  • Prices paid to rise by 8% or more: 11.6% of service firms and 11.7% of manufacturing firms expect prices paid to rise in this range. That’s up from a year ago of 11.0% and 7.6% respectively.
  • Prices paid to rise 2% to 8%: 49.7% of the service sector firms and 49.1% of the manufacturing firms expect prices paid to rise in this range in 2017. That’s up from 47.4% and 42.3% a year ago.
  • Prices paid to increase by less than 2%: 33.9% of service firms and 33.5% of manufacturing firms expect prices paid to increase in this range in 2017. That’s down from 35.6% and 43.4% respectively a year ago.
  • Prices paid to fall: Only a handful of firms expect prices paid to fall.

What these business leaders are indicating is that inflation as measured by their input costs has accelerated in 2016 from a year earlier, and is expected to accelerate further in 2017. These input prices for service and manufacturing firms are expected to rise on average by 4.6% in 2017.

That’s a lot faster than the official measures for consumer price inflation – CPI and the Fed’s preferred PCE. They’re currently below 2%. These are the types of inflation pressures that are now building up deep in the pipeline, despite lackluster demand.

Even Japanese consumers, supposedly suffering from two decades of deflation, are getting whacked. No one escapes. Read…  How Inflation Bites Much More than the Official Hoax and 160 Comments.

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  45 comments for “No Demand, No Problem: Inflation Pressures Surge

  1. Bobby says:

    Seems to sound like a lot of hipe if you ask me, whether if any future inflation occurs in the near term. Hipe is driving up oil and industrial metal prices recently as people assume we will buy loads of stuff in 2017, but what if the status quote remains? That any people’s extra savings goes towards paying down debt, or paying health care costs, or higher mortgage bills now that the rates are rising, or just money put into a savings account..

  2. Sporkfed says:

    FIRE inflation feeding through to the productive economy.
    Wage earners are losing ground.

    • Chicken says:

      “Wage earners are losing ground.”

      For about three decades now, due to “free” trade.

    • Edward E says:

      Momma always told me, “inflation was like a cup of Ivanka coffee” it goes up and they take it down.

  3. gov't driven stagflation says:

    inflation soaring while demand has virtually collapsed cuss gov’t has taken it upon itself to prop everything up with massive printing,borrowing and taxing out the ass,how long before treasury issues 10,000 or 100,000 dollar notes

  4. Chicken says:

    Contraction isn’t inflationary last I checked. Amazon is doing their duty helping to eliminate retail jobs, wonder how Treasury tax receipts are doing?

    • Frederick says:

      Im sure they wont report true numbers anyway so why bother looking Its all a great big psychop Chicky just like the 911 false flag for the sheeples amusement

    • Jimbo says:

      World wide dumping of treasuries and QE to infinity/printing dollars full bore. Venezuela in the US here we go.

  5. Keith says:

    I believe we have been here before. Remember Peter Schiff?

  6. michael engel says:

    -Lexus es300 97 was $36,000- .
    -Today, Lexus ES350 2017 is $41,000- and a
    much better & luxurious car. That’s + 14%/20 yrs .
    -RE are always considered a genius leading
    indicators .
    -They overbuild. Flood the market when it’s too late. Beyond peak.
    -Their turbo charge rent increase, well above
    wage increase, always peak during
    a recession or a major slump.
    -I wonder what will be Toyota profit margin on Lexus
    when the JPY:USD will be 300 .
    -Are they going to flood the market ??
    -A Lexus tsunami ??

    • nhz says:

      I have mentioned the digital camera market before and I think there are similarities.

      A DSLR camera with capabilities similar to a current $300 entry model might have cost $5000 just 15 years ago, and the current model will have far more features and higher operational speed. So prices have come down a lot, although image quality maybe isn’t in every way as good and prices for good lenses have increased a bit instead of decreased.

      However … there is now a clear trend that prices of the more higher end DSLR and mirrorless cameras are going UP instead of down (especially in Europe, less so in US because of the surging dollar), because sales numbers and turnover for camera companies have been declining strongly for several years due to smartphones, market saturation in general etc. Camera manufacturers are getting squeezed and without new markets to tap, they can only increase prices and hope the customers accept. And sooner or later, some of the big players may go out of business because raising prices shrinks the market even further.

      The same might start to happen with cars due to trends like car sharing (instead of owning), autonomous cars and less appeal of cars in general for the average consumer (due to congestion, taxes etc.). This might become evident even faster for ‘quality’ cars using conventional combustion engines. You might get a car that looks better and more luxury for the money from the outside and from the spec sheet, but if the price is lower the real quality under the hood is probably lower as well. If you want real quality (high mechanical quality, durability, reliability etc.), the only way for prices is up.

      • Bil says:

        And how about: Rent , Health Care, Tuition………Bought a steak lately? But we can buy low priced trinkets on Amazon now! Everything must be awesome

        • nhz says:

          yes, inflation in almost everything you cannot avoid (with much of the price increase due to government meddling)

    • Wolf Richter says:

      Michael, could you check the formatting of your commnents. You’re putting line breaks in the middle of the sentence, which puts the rest of the sentence into a new line, which makes it hard to read. If you use a smartphone, it might look ok on your particular device, but it looks like a poem on other devices.

  7. ML says:

    Inflation wouldn’t affect the end consumer if business people were to lower their expectations and a life style above their station in life.

    China could help by reducing its manufacturing coats so that the prices to customers are unchanged.

    We should pursue deflation !

    • Paid Minion says:

      I’ve personally gone from “upper middle class” to “working poor” during my work career.

      Even after promotions. Even working a job where there has supposedly been a “shortage of skilled technicians” for 10-15 years.

      That’s what happens with 5%/every three year “raises” and 2-3% COLAs over 30 years.

      Your loss of standard of living is more noticeable when you stay off the “housing ladder”/”cash out refi” wagon.

      It’s simple really. The suit types are incentivized to cut “overhead”, mainly labor costs. Those that don’t get laid off outright get force fed pay and benefit cuts. Don’t like it? You are invited to GTFOOD, and find a new, better paying job in a job market that resembles the Great Depression for most of the Wretched Refuse.

      The money saved goes into the pockets of the suits and the shareholders.
      Same with outsourcing. Was Carrier AC going to charge less for their AC systems by relocating to Mexico? Hell no. The suits would be rewarded handsomely for their “tough” decision.

      • Mary says:

        Do you should be the suit type or an investor, trader, hedge fund manager etc.

  8. Mike R. says:

    Inflation in everything you need resulting in stagnating economy elsewhere and deflation in everything you want.

  9. Kent says:

    Control healthcare costs and regulate monopolies.

    • Bob says:

      I agree, monopolies are a key issue. Monopolies lead to reduced competition. less innovation, and less jobs. This is also a key reason why there is great wealth disparity like in 1929 – only the business owners benefit through cost cutting. The economies of scale don’t provide benefit to the overall world economy when there is rampant joblessness.

    • Bob says:

      Forbidding large mergers is one of the most pain-free ways to prevent job losses from continuing. If several huge companies are broken up, we would actually create many high-end jobs.

      I can accept job losses from innovation. I can take job losses from globalization. What I have a hard time accepting are job losses caused by Fat Cats that want to unfairly reduce competition. In a chess game, you simply can’t buy out your opponent before he makes a good move.

      Regulators shouldn’t allow this to happen, yet they do – likely because our corrupt campaign finance system. Money buys power, kills fairness and competition.

      • Intosh says:

        Right. Regulators allow this to happen because they are corrupted by neo-liberal capitalism. Neo-liberals deny and don’t want people to understand that capitalism lacking regulations is fertile ground for monopolies; just like in the wild where the top of the food chain remains unchanged for millions of years. Capitalism money corrupts regulators, the masses no longer trust regulators (i.e. The Government) and therefore demand less government intervention and less regulation and as a result, this creates a breeding ground for monopolies.

        • economicminor says:

          Because of the circus of Regulatory Capture. Regulators often have worked for those they are regulating and then when they quit regulating the go back to work for the same or get paid as consultants. And the law doesn’t prevent this because the thinking is that ONLY those who have worked in certain type of business can have any idea how to regulate it.. So the foxes guards the hen houses.

    • Chicken says:

      Hurdle the little guy through regulation that monopoly can avoid by moving off shore.

  10. Jim says:

    The source of this inflation factor wasn’t explained:

    “employee benefits were the biggest culprit in 2016 in actual prices paid. In 2017, they’re expected to soar 7.7% for the service sector and 6.5% for the manufacturing sector”

    But I suspect that rising healthcare costs and insurance overhead, neither of which “benefit” employees, were the main culprits.

    What bothers me is that the knee-jerk reaction to such trends is to cut benefits to employees in real terms, rather than focus on the real problems of rent-seeking, monopoly, and regulatory capture.

  11. michael engel says:

    -Few days ago you had a comment that many of readers are using smart phones.
    – I adjusted to these group of readers. I try to write short sentences, more like punch lines while limiting my email in length and info.
    -Not a poet. Cannot, even speak or write English well.
    – I use google to correct 50% of the content.
    -Hard work, but a great pleasure !!

    • Wolf Richter says:

      Thanks. The comment software adjusts automatically to screen size, whether smartphone or steam-powered PC. So you don’t have to worry about it.

  12. MC says:

    If I were a “malicious seller” I’d say the New York Fed has finally stopped cooking the books. But since I am above such behavior, they must have finally adjusted their emtrics to the situation on the ground: those are numbers we have long seen.

    First hand example: between 2005 and 2016 Honda has hiked the price of their industrial/gardening/agricultural engines and spare parts every January except for 2009. The price increase has always been between 3.5 and 5%.
    These engines are in my opinion a better inflationary indicator than cars and electronics, as improvements have been minimal over this time frame and mostly tied to emission regulation and attempts to reduce manufacturing costs.
    Apart from a few karting enthusiasts and DIY mechanics, the general public is highly unlikely to buy these engines, so the cost increase is mostly born by equipment manufacturers.

    That’s part of the reason why these days the quality gap between “homeowner” and “professional” grade equipment is widening: the big manufacturers such as Husqvarna AB know extremely well their retail customers’ wages have not kept up with real world inflation in a long time so they cut everything they can.
    This past Summer I saw the new lawnmowers Husqvarna AB is selling on the European market. At the moment they are assembled in Italy from Chinese components but that may change in the future as the Swedish group recently opened a new assembly plant in Spain and another in Poland.
    To be honest I would be embarrassed to sell such a product, but I also understand the pressures Husqvarna AB is under. Nobody is immune these days.

    • nhz says:

      I hear similar stories from people who work for companies that produce power tools for both the consumer and professional market, e.g. drills like the Dremel. I’m always amazed to see how much the cost of many tools has gone down after China entered the market 20-25 years ago. Even more amazing is how low the quality standard is nowadays ;-(

      While 30 years ago many tools were designed to last a lifetime, now many of them are more of the ‘disposable’ philosophy … It won’t last but the price is so low that most consumers will not care and simply buy a new tool when they need it for a job. Probably the average consumer is also using far less tools nowadays compared to one generation ago.

      When I was young the average computer hobbyist could do soldering, etc. and many bike or even car owners could do the basic repairs if they had to. Now when something breaks down many users throw it away and buy something new, because repairing isn’t worth it, many recent products are build in such a way that repair is impossible, spare parts are often more expensive than the complete product and buying new stuff from time to time is a treat in itself even if the products are rubbish ;-(

      And it’s not just tools, it’s almost everything. Someone else mentioned here how the quality of T-shirts went down the drain, probably even faster than the prices declined.

      • Greatful again says:

        I use power tools a lot, almost every day. The cheap Chinese stuff is so much less expensive than the more expensive brands (which may be made in China as well) , that I don’t worry about damage, theft, loss and product life anymore. I’ve had more tools lost and stolen than I ever had just wear out or break from normal use.
        I’ve also got friends who’ve bought the expensive brands and had plenty of problems with quality and product life. Most are now converts to cheaper tools.

        • nhz says:

          yes, I can imagine; I think it is just a bit sad how these things have changed, certainly not good for the environment.

          I don’t buy expensive tools myself nowadays (well, maybe for photography …) and one of the main reasons is that indeed even the expensive brands often are not what one would expect given the price and ‘brand name’. And sometimes the cheap stuff, e.g. from brand new Chinese companies, is really good ;-)

      • polecat says:

        But for ‘Progress’ …….

      • Mike B says:

        Yes! Quality has absolutely gone into the toilet. I bought a heavy duty shop vice recently from a well known company that sells Chinese goods. Won’t say the name but it rhymes with ‘Barbour weight’ I bought the more expensive model with the swiveling head ant wasn’t exactly ‘cheap’ ($60 on sale) and the machining on it looked pretty good (the usual tell for bottom or the barrel chi-crap) but after about a month of use the vice head broke off! Yes, -actually fractured and broke off. This was about a 2.5″ thick cast iron cylinder. I was shocked (and pissed) at how poor the metal actually was. Pissed enough to actually hual the thing back to HF and they did replace it outright but I consider it a lesson learned.

        But where the hell do you go for quality now? I don’t like having to hual around a 30lb hunk of iron to replace it every few months. Hell, I’ve got a gym membership that I never use for stuff like that ;)

        • Paulo says:

          Tools post (warning)

          I am a tradesman (carpenter) and ex shop teacher. A decent vise is at least $250. I doubt they are even available, anymore. On my important main tools I buy 1st class. Dewalt compound, General table saw, stuff like that. Canadian Tire actually offers a very good Mastercraft plunge router, which a rule of thumb is $100 per hp for a decent model (Hitachi, etc). For welding I buy the cheapest 4 1/2 inch grinders possible and buy them in bulk when they are under $20 as loss-leaders. I have them set up with a different application in each one so I do not have to take time and change from grinder disk to wire wheel, etc. They last about a year before the bearings go.

          Right now we are using a Honda lawn mower that is probably 35 years old. It has been through two families. We will replace it this year with another one which will undoubtably cost 3X what a Briggs and Stratton piece of Chinese crap costs. My kids will get it one day.

        • MC says:

          Regarding bench vices: I take FZA doesn’t sell their products outside of Europe.
          They are still exactly the same as they were forty years ago and they are still made in Italy in their old factory. I had a look at their catalog recently and they still list exactly the same cast iron ones I have, which are 28 years old, down to the markings.

  13. Doug Neal says:

    Good article. Business expenses are rising sharply but whether they can pass them on to their customers is another matter. It may be that profits will be under even more pressure. Profit margins will mean-revert.

    • nhz says:

      profit margins for smaller companies will be pressured; not for the big ones because those keep getting paid for borrowing money, and they have better lawyers in case they sell really bad products :-(

  14. Colin says:

    The Business Climate index looked good before the recession and never came close to recovering to those previous numbers. Is that a sign of how poor this country is getting?

  15. Robert says:

    “But that’s not the case. Inflation can increase, and sharply so, for a number of reasons other than demand. Inflation expectations have something to do with it.” But not much- you don’t run a fever just because you think you might get the flu. There is a close and inexorable correlation between inflation and the growth of the national debt, though recent increases in domestic oil production through fracking have helped keep the PPI lower than it otherwise would have been.

  16. shedsidechuck says:

    $60 is hardly expensive for a vice, unless it’s a 2″ vice
    used in the jewelry trades. a decent 4″ rotating head vice
    costs $150 these day!

  17. Mike R. says:

    If you want tools that will last, you have to pay top dollar and do your homework. Many are German made.

    For things like a vise; literally, I would be looking on Craigslist or EBAY for an old American made beauty…..well it wouldn’t be pretty to look at after all these years, but I’ll bet you a bottom dollar it works great still.

    Harbor Freight is ok for certain things. I buy expendables there like nitrile gloves, chip brushes, cheap abrasives, etc. But you get what you pay for in general.

  18. JB says:

    hmmm .. inflation with the dollar so strong ? oh this is about the service sector . so i guess the service sector is finally
    realizing wage inflation . BUT why are legally mandated insurance costs rising ? i am sure these costs are a lot
    less in MEXICO . for the life of me i can’t believe why
    legislators are not trying to reduce the cost of doing business.
    these costs can only be absorbed by large companies crowding out the little guy . ” level the playing field ” .

    • MC says:

      As I’ve said before, and I don’t care what people with no experience in the sector says, Big Business loves tight regulation. It’s a small price to pay to eliminate competition or to make it less efficient.

      Big Business can afford to deal with legally mandated higher costs through a variety of means: outsourcing, moving to States which give them tax breaks offsetting insurance costs, hiring interinal workers… and they can do so while maintaining their profit margins.
      Their smaller competitors either cannot (and so have to pass higher costs to their customers) or can do so only by reducing their margins from next to nothing to almost nothing.

      Of course Big Business is not that smart: see their cavorting to “keep the Chinese out” of certain markets only for their CEO’s to sell off the family jewels once Chinese oligarchs and SOEs came waving not so big wands of cash.

      • nhz says:

        agree, I see the same here in Europe.

        Getting CE approval for a new consumer product or e.g. our version of FDA approval for some diagnostic test costs loads of money for lawyers and government agencies that small companies can hardly afford. It doesn’t have any real value because it is just paperwork and doesn’t add any actual certification. If it doesn’t eliminate the competition entirely it at least makes new products from small competitors way more expensive. It stifles innovation as well, so big companies have more time to milk their aging products.

        Same story with tax dodging, in my country (apart from the common misuse of tax heavens for avoiding taxes completely), big companies can make tax deals with the authorities allowing them to pay e.g. 10% business tax instead of the standard 25-35% for smaller companies. Such a tax difference alone is almost impossible to compete with for a small business. And then there is the current huge difference in the cost of loans for big and small companies…

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