Producer prices that are input prices for consumer-facing industries are red-hot. But further up the production chain, prices are white-hot.
By Wolf Richter for WOLF STREET.
We’re going to go step by step so you don’t get dizzy right away. The Producer Price Index for Final Demand – these are input prices for consumer-facing industries and are the next step up in the pipeline for consumer prices – jumped by 0.7% in August from July. This pushed the year-over-year increase of the PPI Final Demand to 8.3%, the biggest year-over-year jump in the data going back to 2010.
Prices for goods jumped by 1.0% month-over-month, including food up 2.9% (35% annualized), with meats up 8.5% (102% annualized), while energy rose 0.4%.
Prices for services jumped by 0.7% month-over-month, including a 2.8% spike in transportation and warehousing costs (34% annualized), reflecting port congestion, spiking container freight rates, backlogs, and general chaos in peak shipping season before the holidays.
The core PPI, which excludes the volatile food and energy segments – though food and energy make up a big part of spending for consumers whose income is on the lower portion of the income scale – rose 6.7% year-over-year according to the Bureau of Labor Statistics today.
If businesses are able to pass on those price increases – which they have been easily able to do this year because the whole inflationary mindset has changed – then they will end up in consumer price inflation, at which point consumers will encounter them.
While some prices that previously spiked have now been declining for a month or two, other prices that had risen more moderately in prior months, or had declined, are now jumping. The overall indices average out this game of Whac-A-Mole.
Further up the pipeline: Intermediate Demand.
Intermediate Demand comes in four stages by production flow, ranging from Stage 1 industries that are some distance up the production flow and create in puts for State 2 industries, to Stage 4 industries that primarily create the inputs for Final Demand industries, which create the inputs for consumer-facing industries.
Across all four stages of the production flow, inflation pressures were high, and these pressures will likely be passed on to final demand industries, and from there to consumers. We’re going backwards up the pricing pipeline of the production flow.
Intermediate Demand, Stage 4: +0.8% in August, with goods +0.9% and services +0.7%. Year-over-year: +12.1%, the biggest jump in the data going back to 2010. These industries create inputs for consumer-facing industries.
Increases in prices for meats; machinery and equipment parts and supplies wholesaling; metals, minerals, and ores wholesaling; structural, architectural, and pre-engineered metal products; steel mill products; and nonresidential real estate services outweighed…
Declines in prices for securities brokerage, dealing, investment advice, and related services; softwood lumber; and hardware, building materials, and supplies retailing.
Intermediate Demand, Stage 3: +1.0% in August, with goods +1.9% and services +0.0%. Year-over-year: +20.2%.
Increases in prices for steel mill products; slaughter poultry; metals, minerals, and ores wholesaling; industrial chemicals; corn; and slaughter steers and heifers outweighed…
Decreases in prices for television advertising time sales, raw milk, and softwood lumber.
Intermediate Demand, Stage 2: +0.4% in August, with goods +0.5% and services +0.3%. Year-over-year: +21.8%.
Increases in prices for gas fuels; industrial chemicals; steel mill products; machinery and equipment parts and supplies wholesaling; transportation of passengers (partial); and oilseeds outweighed
Decreases in prices for crude petroleum, television advertising time sales, and softwood lumber.
Intermediate Demand, Stage 1: +0.9%, with goods +1.3% and services +0.5%. Year-over-year: +21.1%, matching July.
Increases in prices for industrial chemicals; steel mill products; metals, minerals, and ores wholesaling; transportation of passengers (partial); building materials, paint, and hardware wholesaling; and structural, architectural, and pre-engineered metal products outweighed…
Decreases in prices for hardware, building materials, and supplies retailing; securities brokerage, dealing, investment advice, and related services; and diesel fuel.
The 4 stages of Intermediate Demand production flow in one chart.
Prices in the three production stages that are the furthest up the pipeline (Stages 1-3, red, green, gray) have all jumped by over 20% year-over-year. Prices at production stage 4 (black), up 12.1% year-over-year, are inputs for final demand prices, which are inputs for consumer prices.
Final demand prices are what consumer prices will encounter pretty soon in their consumer prices. Stage 4 intermediate demand prices will follow. And prices in productions stages 1-3 are further behind, but they’re true whoppers, and they will provide massive pressures on consumer prices for months to come:
These are the kinds of price increases that are now coming down the pipeline toward the consumer. With the current inflationary mindset – radically changed from the mindset in prior years – consumers, flush with free money, have been accepting higher prices, and companies are confident that they can pass on higher prices. And there is a good chance in this inflationary mindset that industries further up the production pipeline will be able to pass these price increases down the line all the way to the consumer, and that the consumer will pay them.
“We need lower consumer demand to give supply chains time to catch up… recover efficiency… and break this vicious circle”: CEO of Maersk’s APM Terminals, one of the largest container port operators. Read… The Everything Shortage & Price Hikes Plastered All Over Fed’s “Beige Book”
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