BLS report shows low inflation in services

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
Health care  2.1%
Information 1.4%
Banks -5.8%
Real estate agents -0.7%
Employment services 1.1%

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

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Reader Comments

Dominic

April 15, 2008 01:45 PM

Michael

Forgive me if I say something of little sense but at first thought this sounds logic to me.
There is not overall shortage of labor, a great component of cost, correct me if I'm wrong, in services. The weakening job market (it has never been really strong in the last 7 years but let's not digress...) is definitely a fsctor in dampening service cost inflation.
But we do have increasing demand and, at the moment, a component of investor speculation for commodities around the world and that drives up prices of goods.
Commodity prices are mostly set globally and are more sensitive to global demand and currency debasement induced inflation than labor in my opinion.
It is true that our economy is nowdays mostly based on services but we stil need to pay for imported goods...so I do not really know if the Fed can really cut rates that easily.

re

April 15, 2008 03:32 PM

so what the job cost to the co.s mitigated by layoffs benefit reduction and outsourcing to foreign countries

Sean

April 15, 2008 06:11 PM

Before concluding that prices for services are more important, shouldn't you examine who benefits and who suffers from inflation?

Rising prices hurt consumers of those products. My guess is that the percent of U.S.-manufactured goods (such as cars) that are consumed here versus elsewhere is higher than the percent of services consumed domestically versus abroad.

And who benefits from rising prices? Employees through higher wages and shareholders through higher profits. This is counter to your argument that service inflation is more malignant because there are more service sector employees.

Then there is the issue of inflation expectations. Some economists say that inflation itself is inoccuous in the macroeconomic sense if it is entirely predictable. It is the introduction of uncertainty into production forecasting that causes inflation to be a drag on output. If this is true, then this might pose a bigger problem for goods than services due to the lead time involved in ramping production and the associated pre-production costs incurred when building additional manufacturing capacity.

Mike Mandel

April 15, 2008 06:38 PM

yes, it's probably the result of low labor costs. I didn't say whether it was good or bad, just that it meant inflation fears were overblown.

Kartik

April 15, 2008 06:39 PM

Even healthcare rose only 2.1%? That can't be - everyone's insurance premiums, even for HMOs, have risen MUCH more than 2.1% in the last year.

Cutting rates any lower will merely cause other distortions. 2.25% is pretty darn low right now.

Mike Mandel

April 15, 2008 06:51 PM

Kartik,

Yep, that's what it was. I will add a link to the report so you can see for yourself.

These are producer prices, as charged by the hospital or doctor. They are not inconsistent with rising premiums if companies are trying to push off more of the cost onto workers.

rycoka

April 16, 2008 04:54 AM

I wonder what the economic forces are that allow prices to rise faster than wages over a sustained period of time?

Brandon W

April 16, 2008 09:25 AM

Sean writes, "And who benefits from rising prices? Employees through higher wages and shareholders through higher profits."

Employees aren't seeing their wages rise as fast as inflation, so they're losing ground. Additionally, a statistic not talked much about is that 565,000 people who had full-time jobs a year ago are now working part-time jobs. I'm willing to bet most aren't doing so voluntarily. With that comes a loss of health insurance and likely major difficulty re-entering the workforce at the same level they were at a year ago.

I also continue to argue that we need to look at statistics split at the 90th percentile. Although the economy is increasingly affecting those in the top 10%, the bottom 90% are getting destroyed and have been for the past 7 or 8 years. Just talking about aggregate statistics doesn't capture that.

Joe Cushing

April 16, 2008 04:40 PM

What this means is that we have real price increases. All this ties in with the lack of growth in wages. Sense a lot of us provide and therefore profit from the low inflation services our wages are not going up. So the price of labor isn't going up, the price of service isn't going up, and the price of goods are. Sounds like there must be increased demand for goods driving their prices up and making it harder for us to buy them with the same wages. Hmmm, isn't that what we have been saying for a year? Our standard of living just fell.

You can call it a real price increase or you can call it inflation combined with a real wage decrease. The reality is we have some combination of the two and it is difficult to measure how much of one and how much of another. Remember when you were asking us to give you are dream statistics. I said better inflation tracking. This is what I'm talking about--separation real price changes from inflation.

Lord

April 20, 2008 02:59 AM

Well, the week is up. Back to gloom and doom then.

Mike Mandel

April 21, 2008 10:44 AM

No, no no..this week.

MIke

August 3, 2009 08:13 PM

I wonder what the economic forces are that allow prices to rise faster than wages over a sustained period of time?
Durastripe
It is amazing how this is effecting the us now!

cm

August 3, 2009 11:47 PM

It's probably largely the same as with goods - there are "staple" services which can maintain or raise prices, and discretionary services which are easily shucked when household finance requires triaging of expenses.

Also probably a substantial part of services are "multiplier" services catering to business or feeding off of business (business services of various descriptions, restaurant lunch business, corporate meal catering, ...). As "primary" businesses close or tighten the purse strings, so go the multiplier industries.

I have seen maybe 10% price inflation on restaurant lunches over much of the last decade, on a same-store basis (those would be restaurants that have survived the decade, quite an achievement). In grocery retail it has been probably almost that much annually.

Thank you for your interest. This blog is no longer active.

 

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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.

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