Producer price index

- I don't buy a lot of gasoline. I drive a small car and I usually work remotely, so you would think that oil prices might not be a big inflationary concern for me, but you would be wrong. Big swings in oil prices matter to me, not just because I forecast them. They matter because they can drive up the prices of other things, too. Unless you live on a deserted island or an isolated pre-industrialized village that's been featured in a National Geographic documentary, chances are that almost everything you own was manufactured somewhere else and that stuff had to be transported to you. At every stage of manufacturing, physical goods are transported around and that requires diesel for trucks or bunker fuel oil for ships. If oil prices rise enough, you might not just feel the pain of higher prices at the gas pump, you could feel it everywhere else, too. This kind of inflation most directly impacts manufacturers and it's called producer inflation. It can impact every stage of a manufacturing process, and if stuff costs more to make, it will probably cost more to buy. In the United States, producer inflation is measured by the Producer Price Index, otherwise known as the PPI, which is released monthly by the Bureau of Labor Statistics. While there's a big focus on consumer inflation by central banks, producer inflation is watched closely as well for a few different reasons. First, major swings in finished producer inflation can have a leading impact on consumer inflation. In other words, a big rise in producer inflation this month could lead to a big rise in consumer inflation down the road. If the price of steel rises sharply, this could send up the price of a car frame and that can send up the price of a car. Second, producer inflation can erode company profit margins. While some of these impacts, like the higher cost of a car, will hit your wallet directly, it might not be as clear to the average person how producer inflation can pass through to send consumer prices higher, or how more producer inflation can hurt company profits. In the PPI report, there are four stages of intermediate demand before getting to the final demand for a good or service, before getting to you. We already talked about steel so let's use car manufacturing with an aluminum part like spinning rims as an example to see how aluminum moves to the final demand through the four stages of the PPI. In stage one, there's goods production like alumina and bauxite mining. These are minerals used to make aluminum and they come out of the ground. In stage two, aluminum is fabricated. In stage three, auto parts are made from the aluminum. You need those spinning rims, am I right? And in stage four, light trucks and cars are made from parts, including the aluminum parts, those spinning rims that came from the third stage. In the PPI, the price differences are recorded at each of these four intermediate manufacturing stages, as well as in the final demand stage, when goods, services, and construction are sold to final demand. In other words, it's the change in prices for that finished vehicle when it's sold to you. One thing to know about the PPI is that even though there's a major focus on manufactured goods, there's also a measure producer inflation for services. Monthly changes in producer inflation are often influence by big swings in commodity prices like swings to the price of steel, aluminum, or oil, but the year over year producer inflation rates tend to be more important for telling a story over time and that's what central bankers care about when determining policy. What's the smoothed out story over time? There are big differences between final producer inflation and consumer inflation. Homeowner rent isn't part of producer inflation, but it is part of consumer inflation, and there are a number of other differences. If you want to dig on the difference between the CPI and the PPI, I've included a link to a report from the BLS.