Table of PPI Data from the Labor Department, in Percent Changes

                             JUL    JUN    MAY
PPI, Finished Goods 0.1 0.5 0.2
PPI, Ex. Food, Energy -0.3 0.2 0.3
Energy 1.3 0.7 0.4
Foods -0.3 1.4 -0.5
Consumer Goods 0.2 0.6 0.2
Residential Electricity 1.8 -2.8 0.1
Residential Gas 0.9 -3.7 -3.1
Gasoline 0.7 6.3 2.2
Home Heating Oil -2.7 6.5 2.6
Drugs -0.2 0.3 1.9
Autos -0.8 0.9 -0.4
Tobacco 0.0 0.2 0.0
Capital Equipment -0.2 0.3 0.3
Intermediate Goods 0.5 0.7 1.1
Ex, Food, Energy 0.7 0.8 1.1
Crude Goods 3.1 -1.7 2.0
Ex. Food, Energy 1.3 1.7 6.2

BLS Discussion of the PPI

The Finished Goods Price Index is one of the Nation’s most closely watched indicators of economic health. Movements in this index are often considered to presage similar changes in inflation rates for retail markets, as measured by the Bureau’s Consumer Price Index. Still, there are many reasons why short-term movements in the PPI and the CPI may diverge. For example, by definition, the Finished Goods Price Index excludes services, which constitute a major portion of the CPI. Similarly, the Producer Price Index does not measure changes in prices for imported goods, whereas the Consumer Price Index includes imports. Conversely, the CPI does not capture changes in capital equipment prices, a major component of the Finished Goods Price Index. Finally, large swings in producer prices for foods and other items may be considerably dampened by the time retail prices are measured.

Other commodity-based SOP price indexes besides the Finished Goods Price Index also are used for general economic analysis. Because prices for food and energy have tended to be so erratic in recent years, some economists prefer to focus attention on an index measuring prices for finished goods other than foods and energy as a better measure of the so-called core or underlying rate of inflation. The Index for Intermediate Materials, Supplies, and Components is closely followed as an indicator of material cost pressures that may later appear in the Finished Goods Price Index or the CPI. The Index for Crude Materials Other than Foods and Energy is quite sensitive to shifts in total demand and can be a leading indicator of the state of the economy; its limited scope, however, makes it less reliable as an indicator of future inflation in general.

The following comments were made by Kevin Depew on Minyanville.

  • The producer price index for finished goods rose 0.1% in July, below the 0.3% gain expected, the U.S. Labor Department said.
  • The core PPI – which excludes food and energy prices – fell 0.3%, the first decline since October.
  • Prices for finished goods other than food and energy showed a an outright decline, 0.3% in July. Isn’t that a sign that demand for finished goods is decreasing?
  • A close look at the figs show the 12-month change in the prices for finished goods still rising at a 4.2% annual rate.
  • Intermediate goods rose 0.5%, after a 0.7% rise in June. The 12-month change in intermediate goods is rising at an 8.9% annual rate.

Here is the question of the day:
Where is the pricing power?

Doesn’t the spread between finished goods and intermediate goods suggest an inability to pass through costs?

Of course one month does not make a trend. Enquiring Mish readers want to see more rigorous proof or at least something longer than a one month stand. I offer the following chart of the long term trend of the finished goods PPI vs the intermediate goods PPI with thanks to Scott Reamer of Minyanville.

Click on chart for a sharper look.

I can not help but repeat myself.
Where is the pricing power?

In the wake of slumping home sales and weakening consumer demand for goods and services, expect the trend depicted in the above chart to continue and/or expect the intermediate PPI to take a turn south itself.

Thanks to Scott Reamer and Kevin Depew of Minyanville for this unique look at the PPI.

Mike Shedlock / Mish/