The Producer Price Index (PPI) got posted this morning courtesy of the Bureau of Labor Statistics. The headline number was 10.7% year-over-year increase. This is the sixth consecutive month of double-digit annual gains.
The PPI is divided into multiple categories and special groupings. You can see them all on the Fed’s Table 7 release. The headlines all revolve around final demand but this figure is a composition of the final demand for goods and the final demand for services. When you split them apart, you can start to see what is going on.
Final demand for goods has been red-hot and its currently running at 16.4% year-over-year. This has been a blistering pace. This is the increase in the cost of goods that businesses are charging other businesses.
Final demand for services was quite steady prior to 2020. However, it took off after the lockdowns. It is currently running at 7.6% year-over-year. This is a drop off from the peak two months prior.
When you take the two separate categories into account, you can see how the final demand for goods has been on fire and that services has lagged. Services have also been more stable while goods were more erratic. Going into a recession, businesses are going to tighten down on expenses. Because of this, I believe the final demand for services will take the bigger hit. This could drag down future PPI releases. This could be deceiving since supply-side inflation for goods will stay hot. Either way, businesses are struggling mightily. They are paying more for goods and services and are struggling to pass on the costs to consumers. Here’s the proof:
Above I’ve subtracted the PPI from the CPI. We are well below the 1970s at this point. There is no comparison to the amount of stress that is hitting the system. Businesses that aren’t profitable are going to go under very quickly. This is going to be a hot mess of malinvestment that is going to get unwound.