PPI Rises 0.4% in August as Diesel Jumps 24%, Lifting Goods Prices

Producer prices turned up again in August, and the cause is the same commodity that drove the swings earlier in the year. The Producer Price Index for final demand rose 0.4 percent on a seasonally adjusted basis, the Bureau of Labor Statistics reported on Thursday, after increases of 0.1 percent in July and a decline of 0.1 percent in June. Unadjusted, final demand prices were up 5.4 percent for the 12 months ended in August, compared with a revised 4.8 percent for July.

The report gives an early indication of the cost pressure that CPI inflation will have to absorb when the August consumer figures arrive. The answer from the producer side is that energy has stopped subtracting and is adding again, and sharply.

Diesel drives the increase in goods prices

Final demand goods rose 1.1 percent in August after two consecutive monthly decreases. Final demand energy increased 4.2 percent. Goods less foods and energy rose 0.4 percent and foods 0.1 percent. The detail points to one product above the rest: diesel fuel prices jumped 24.1 percent and accounted for over a third of the increase in final demand goods. Gasoline, jet fuel and home heating oil also rose, as did candy and nuts and tobacco products. Residential electric power fell 0.5 percent, and fresh sausage and aluminum mill shapes declined.

Diesel matters for the inflation outlook more than its weight in the index would suggest because trucking, farm equipment, construction and rail all run on it. The same product leads the intermediate demand data, where diesel fuel rose 24.1 percent and accounted for nearly two-thirds of the increase in the index for processed goods for intermediate demand. A cost that rises at the earliest stages of production tends to appear in later stages, so the August diesel move is an input to the prices of many items that do not look like energy.

In June, a 12.0 percent fall in gasoline prices drove most of the decline in final demand goods, and diesel in the intermediate index dropped 18.0 percent. The August gain is large enough to reverse a good part of that move, though the figures involve different indexes and should not be added up directly.

Services: transportation up, fuel margins down

Final demand services rose 0.1 percent, the third consecutive monthly increase. Transportation and warehousing services jumped 2.3 percent, led by truck freight, which rose 2.0 percent; airline passenger services, legal services and hospital inpatient care also rose. The cost of moving goods is moving up with the cost of the fuel used to do it, which fits the diesel data.

Trade margins fell 0.2 percent, and the index for services other than trade, transportation and warehousing was unchanged. The sharpest drop came in margins for fuels and lubricants retailing, down 11.3 percent. That is the reverse of June, when those margins rose 13.0 percent and accounted for half of the services increase. When wholesale fuel prices rise quickly, retailers’ spreads tend to narrow because pump prices lag, and the producer index records that squeeze as a decline in a service price. Health, beauty and optical goods retailing, machinery and equipment wholesaling and portfolio management also declined.

The mix explains why the services index barely moved even as the goods side surged. In the producer index, the retail margin on a gallon of fuel is a service price, so a spike in the wholesale price of the fuel shows up as a gain in goods and as a loss in services at the same time.

What the annual rate says

The 12-month rate of 5.4 percent compares with a revised 5.6 percent in June. The index for final demand less foods, energy and trade services rose 0.3 percent in August after 0.4 percent in July, and is up 4.7 percent over 12 months. That core-style measure is the more stable of the two, and its steadiness at 4.7 percent for a second month shows that the headline acceleration owes much to energy.

Monthly final demand changes for the three most recent months were minus 0.1 percent in June, plus 0.1 percent in July and plus 0.4 percent in August. The BLS revised data for April through July to reflect late reports and corrections.

Pressure in the pipeline

The intermediate demand indexes show cost increases at earlier stages. Processed goods for intermediate demand rose 1.8 percent in August and are up 11.5 percent over 12 months. Unprocessed goods rose 1.1 percent, led by a 3.7 percent increase in nonferrous scrap, with crude petroleum, slaughter poultry, corn and nonferrous metal ores also higher; slaughter cattle fell 6.4 percent. Unprocessed goods are up 12.8 percent on the year. Services for intermediate demand rose 0.3 percent, a 5.1 percent annual increase.

By stage of processing, all four production stages rose in August. Stage 1 prices, the earliest, increased 1.4 percent and are up 11.3 percent over 12 months. Stage 2 rose 0.8 percent (9.7 percent annually), stage 3 rose 0.8 percent (6.5 percent) and stage 4 rose 0.4 percent (6.7 percent). Larger increases at earlier stages point to cost pressure that has not yet worked through to the final stage. How much of it reaches consumers depends on competition and demand.

What to watch

Two questions follow from the report. The first is whether diesel prices hold their August level. A one-month surge of 24.1 percent invites a partial reversal, and the producer index has shown in June and July how quickly a commodity move can reverse. The second is whether the cost of moving goods, which rose 2.3 percent in transportation and warehousing, passes through to the prices consumers see in the second half of the year.

The September report is scheduled for October 15. The August jobs report, issued six days earlier, showed average hourly earnings up 3.1 percent over the year, well below the 5.4 percent annual rise in producer prices. The two measures cover different things, but the gap illustrates the squeeze on businesses whose input costs are rising faster than the pay they offer.