"Up the Price Pipeline, Inflation Rages at 20%"

 Source:

https://wolfstreet.com/2021/09/10/up-the-price-pipeline-inflation-rages-at-20/

"Producer prices that are input prices for consumer-facing industries are red-hot.

But further up the production chain, prices are white-hot.

These are the kinds of price increases that are now coming down the pipeline toward the consumer.

With the current inflationary mindset – radically changed from the mindset in prior years – consumers, flush with free money, have been accepting higher prices, and companies are confident that they can pass on higher prices.

And there is a good chance in this inflationary mindset that industries further up the production pipeline will be able to pass these price increases down the line all the way to the consumer, and that the consumer will pay them."

The Producer Price Index for Final Demand – these are input prices for consumer-facing industries and are the next step up in the pipeline for consumer prices – jumped by 0.7% in August from July.

This pushed the year-over-year increase of the PPI Final Demand to 8.3%, the biggest year-over-year jump in the data going back to 2010:

Prices for goods jumped by 1.0% month-over-month,

including food up 2.9% (35% annualized),

with meats up 8.5% (102% annualized),

while energy rose 0.4%.

Prices for services jumped by 0.7% month-over-month,

including a 2.8% spike in transportation and warehousing costs (34% annualized), reflecting port congestion, spiking container freight rates, backlogs, and general chaos in peak shipping season before the holidays.

The core PPI, which excludes the volatile food and energy segments – though food and energy make up a big part of spending for consumers whose income is on the lower portion of the income scale

– rose 6.7% year-over-year according to the Bureau of Labor Statistics today.

If businesses are able to pass on those price increases

– which they have been easily able to do this year because the whole inflationary mindset has changed –

then they will end up in consumer price inflation, at which point consumers will encounter them.

While some prices that previously spiked have now been declining for a month or two, other prices that had risen more moderately in prior months, or had declined, are now jumping.

Further up the pipeline: Intermediate Demand.

Intermediate Demand comes in four stages by production flow,

ranging from Stage 1 industries that are some distance up the production flow and create in puts for State 2 industries,

to Stage 4 industries that primarily create the inputs for Final Demand industries,

which create the inputs for consumer-facing industries.

Across all four stages of the production flow, inflation pressures were high, and these pressures will likely be passed on to final demand industries, and from there to consumers.

We’re going backwards up the pricing pipeline of the production flow.

Intermediate Demand, Stage 4: 

+0.8% in August,
with goods +0.9% and services +0.7%.
Year-over-year: +12.1%,
the biggest jump in the data going back to 2010.

These industries create inputs for consumer-facing industries.

... Intermediate Demand, Stage 3:
+1.0% in August,
with goods +1.9% and services +0.0%.
Year-over-year: +20.2%.

... Intermediate Demand, Stage 2:
 +0.4% in August,
with goods +0.5% and services +0.3%.
Year-over-year: +21.8%.

... Intermediate Demand, Stage 1:

+0.9%,

with goods +1.3% and services +0.5%.

Year-over-year: +21.1%,  

matching July.

The 4 stages of Intermediate Demand production flow in one chart:

Prices in the three production stages that are the furthest up the pipeline (Stages 1-3, red, green, gray) have all jumped by over 20% year-over-year.

Prices at production stage 4 (black), up 12.1% year-over-year, are inputs for final demand prices, which are inputs for consumer prices.

Final demand prices are what consumer prices will encounter pretty soon in their consumer prices.

Stage 4 intermediate demand prices will follow.

And prices in productions stages 1-3 are further behind, but they’re true whoppers, and they will provide massive pressures on consumer prices for months to come"