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Posted by: Michael Mandel on April 15
This morning the BLS reported that the producer prices of finished goods jumped by 1.1% in March, putting them up by 6.9% over the past year. This was the headline number that freaked everyone out.
But everyone is looking at the wrong number. While the producer prices for goods are rising fast, but producer prices for services are not…and it may be the latter which is more important.
It used to be that the BLS just tracked the producer price of goods. But over the past few years the BLS has been extending its coverage to a lot of service industries, which are a much bigger part of the economy than goods. And in those service industries, inflation is quite low—only 1.2% over the last year.
Only a 1.2% increase in service sector prices—that’s astonishingly low, especially since we have typically thought of services as being high inflation. What’s more, services are a much bigger portion of the economy. One measure: Less than 20% of private sector workers are employed in goods-producing industries.
Here are some examples of industries which the BLS is tracking, and their price increase over the past year.
|change in producer prices over past year|
|Real estate agents||-0.7%|
My conclusion from this report is that at least for now, the acceleration of inflation in goods is being damped out by the slow inflation in services. This should not stop the Fed from cutting rates again.
Updated to add link to BLS report
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.