Our economy is full of leading and lagging indicators. The Consumer Price Index (CPI) is a lagging indicator. It tells Americans how much more they are already paying for a basket of goods the Bureau of Labor Statistics believes most Americans buy. One forward-looking indicator can inform Americans about the trend for inflation down the road. The Producer Price Index, monitored since 2010, measures the wholesale prices the producers of goods and services pay for their raw materials and inputs. On Wednesday, the PPI for March was published at 11.2% year over year. That is the highest recorded to date.
The CPI was released on Tuesday and showed a year-over-year increase of 8.5%. Speaking to a crowd in Iowa, President Joe Biden assured Americans he was taking every executive action possible to relieve the financial burden of inflation. White House Press Secretary Jen Psaki told them that Tuesday’s release did not capture the effects of the administration’s efforts during March. However, the PPI tells a different story.
According to Carol Roth, author of The War on Small Business and a “recovering” investment banker, the increase in PPI could mean additional price increases. “The PPI is a wholesale inflation number, meaning that it looks at inflation related to the inputs that go into finished goods and services. So, what you are seeing from producers and manufacturers now has not been passed on yet in full to the companies who act as intermediaries or consumers. This indicates that at least at the core level of inflation could very well rise again next month.”
Roth also cautions that the ongoing financial impact will linger even when inflation peaks. “Even when we hit a peak, remember that it is a peak in growth, not a peak in prices, and it does not undo the inflation we are already bearing. So these extra costs are ones that households are going to be contending with for quite some time, particularly as wage growth has not kept pace with inflation.”
Her point on wages is put in stark relief by Charlie Bilello, founder and CEO of Compound Capital Advisors. According to his analysis of Tuesday’s release, cumulative inflation wiped out the 11.1% wage growth since February 2020. So, Americans are already paying more for goods and services with dollars worth the same as at the beginning of the pandemic. Based on Roth’s explanation of the PPI, soon Americans could be purchasing more expensive items, making their dollars worth even less.
Biello’s analysis also shows that some of the highest rates of inflation in the last 12 months have been in energy costs. Gasoline is up 48%, gas utilities have increased 21.6%, and electric energy is up 11%.
Roth notes that while these increases hurt when we fill up our gas tanks, they also hurt us when a transportation company fills a semi or an airplane. “In terms of the impact of energy, that impacts not just the consumer directly, but every aspect of goods and services. From material inputs to transportation, those costs weigh heavily throughout the supply chain.” Petroleum could also be a key driver in increasing the PPI since over 6,000 products require it for at least one input. Everything from roofing shingles to denture adhesives uses some compound from petroleum. It will also affect food prices since tractors, combines, and other farm equipment that requires fossil fuel to run.
The one action Biden could have taken to relieve the economic pressure on many Americans was opening the spigot on our own energy production. He could repeal a slew of executive orders that limited production that he signed during his first days in office with the stroke of a pen. Instead, he and members of his administration shrug and tell Americans to buy an electric vehicle. Perhaps they missed the fact that the price of new cars rose 12.5% in the past year. Used cars have skyrocketed in cost with a 35% increase. Even a 2018 Prius may be out of reach for most families.
The president’s Build Back Better agenda will blow more dollars into an overheated economy if any significant portion of it moves forward. Yet Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer have indicated they would like to revive it. A few days of fuel released from the strategic reserves is not a long-term solution and makes America less secure. The Biden administration is doing nothing to address the root causes of the inflation, making life difficult for most Americans. And leading indicators foreshadow things will only get more difficult for some time to come.