October producer prices: more evidence that supply chain pressures have eased

– by a New Deal Democrat

Let me start this discussion on the producer price index for October by pointing to the New York Federal Reserve’s “Index of Global Supply Chain Pressures” for the past 5 years through October:

Before Trump’s 2018 tariffs, this index was mostly just below zero. It increased when the pandemic, and with the exception of a few months, remained there until the spring of this year. In general, there has been a decline since the beginning of this year and especially since May. It now shows just a little more than “normal” pressure.

As supply chain issues ease, so does pressure on producer prices. In October, prices for final demand and “core” demand less food and energy increased by 0.2%:

Year-on-year, final demand PPI eased to 8.0% (compared to a March peak of 11.7%), while “core” prices eased to an 8.1% gain:

Perhaps more importantly, for the last 4 months the PPI of final demand has increased by exactly 0.0. With pressure on the supply chain easing, if this slowdown continues, sometime next spring producer prices will be within their “normal” pre-pandemic inflation range.

It should be noted that producer prices of construction materials decreased by -1.3% in October (blue, lower left scale); year-on-year, they have slowed to just a 2.9% gain (red, right scale):

This is in marked contrast to the rising 7.9% year-on-year increase in the “equivalent owner rent” in the CPI. Here is a comparison of CPI and PPI for the past two years:

If producer and consumer prices continue to develop as they have since the middle of this year, then by the middle of next year both will be back in a “normal” range. The question remains, how much damage will the Fed insist on doing before we get there?

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