April’s Producer Price Index for final demand confirmed the wholesale cost of goods and services has already returned to a 2 percent range, which should enable Fed officials to say the battle against COVID-induced inflation is almost won. But will they?
“The Producer Price Index for final demand advanced 0.2 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported yesterday. On an unadjusted basis, the index for final demand moved up 2.3 percent for the 12 months ended in April.”
April’s Consumer Price Index slowing as well, showing retail prices dropping to a 4.9 percent inflation rate yesterday. It means other factors are keeping retail inflation higher than the wholesale cost of materials.
The so-called PPI should be a more accurate measure of inflation, since it reflects the downward trending costs of stuff that goes into retail goods and services.
Supply chains are being replenished, in other words. Retail inflation has remained higher because corporations today are making record profits by padding their profit margins. They took advantage of the sudden supply shortage during the COVID pandemic.
But as supplies are replenished—particularly by the Asian countries including China that produce most consumer goods—wholesale prices have fallen sharply, forcing corporations to lower their profit margins to a more normal level.
Average hourly wages of employees are also rising faster than normal (4.4 percent), and now the Fed considers higher wages to be the main inflation danger. So, it has prolonged their tightening cycle because it wants corporations to cool the red hot labor market.
Some 80 percent of wholesale costs was in the service sector that caters primarily to consumers that love their leisure activities such as travel and dining out. Over one-third of the April advance in the index for final demand services can be traced to a 4.1-percent rise in prices for portfolio management. The indexes for food and alcohol wholesaling, outpatient care (partial), loan services (partial), hospital inpatient care, and guestroom rental also moved higher.
We can now see clearly why consumers are fearing a recession. The University of Michigan sentiment survey plunged because of such fears.
“Consumer sentiment tumbled 9% amid renewed concerns about the trajectory of the economy, erasing over half of the gains achieved after the all-time historic low from last June,” said survey director Joanne Hsu. “While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff.”
The Fed must pause any further rate hikes while congress works out some kind of debt ceiling compromise. Any compromise will slow economic growth further, which should bring down retail prices as well.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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