Slowing services inflation

Posted by: Michael Mandel on July 15

Repeat after me..services inflation is slowing, not rising. In particular, producer price inflation in the “traditional service industries” is only 0.6%, on a year over year basis, down from 1.8% in December.

But you would never know this, from the coverage of today’s PPI report. The majority of the economy is services, not manufacturing. Yet most reporters (slap, there I go again) persist in focusing on the producer price index for goods.

In fact, the BLS producer price index for “traditional service industries” is arguably the best gauge of inflationary pressures that we have. That includes information, healthcare, finance, real estate, legal services, architecture services, management consulting, advertising, employment services, waste collection, computer training, amusement parks, golf courses, fitness centers, hotels, and a few other categories”. Many of these industries are business-to-business, so they don’t show up in the CPI, but they are important neverless.

Here is the year over year growth in producer prices for the traditional service industries.

traditional services_4619_image001.gif

I like this chart…

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Reader Comments

Joe Cushing

July 15, 2008 04:09 PM

A few thoughts

Real estate services should be down about 15 or 20% since they are closely related to the price of real estate. The price of the service probably hasn't changed in terms of the the percentage of sales.

How do we measure inflation in this area? Didn't we have productivity improvements? How do we know what is real and what is inflation? Couldn't it just be that we laid off millions of excess people and are producing the same services with less? Wouldn't that just mean real prices have fallen while actual price stays the same? Isn't that inflation?

For example the cost of service A drops by 10% due to competition and productivity improvements. At the same time the economy faces 10% inflation. The price of service A stays the same. Product B has a productive price drop of 5% in the same environment and the price goes up by 5%.

The point I'm making is that prices of all goods and services should be falling year over year as they are more efficiently produced. If prices stay the same, that's inflation. It's very difficult to measure any inflation during a recession because that is when we have sweeping productivity improvements and competitive price cuts. This is especially true in industries that don't have lots of fixed costs--like most services.

Joe Cushing

July 15, 2008 04:11 PM

A few thoughts

Real estate services should be down about 15 or 20% since they are closely related to the price of real estate. The price of the service probably hasn't changed in terms of the the percentage of sales.

How do we measure inflation in this area? Didn't we have productivity improvements? How do we know what is real and what is inflation? Couldn't it just be that we laid off millions of excess people and are producing the same services with less? Wouldn't that just mean real prices have fallen while actual price stays the same? Isn't that inflation?

For example the cost of service A drops by 10% due to competition and productivity improvements. At the same time the economy faces 10% inflation. The price of service A stays the same. Product B has a productive price drop of 5% in the same environment and the price goes up by 5%.

The point I'm making is that prices of all goods and services should be falling year over year as they are more efficiently produced. If prices stay the same, that's inflation. It's very difficult to measure any inflation during a recession because that is when we have sweeping productivity improvements and competitive price cuts. This is especially true in industries that don't have lots of fixed costs--like most services.

david foster

July 15, 2008 04:18 PM

1)If something has both services & goods components...I'm thinking specifically about restaurants...are they counted separately or aggregated as "services?"
That is, is the inflation due to food price costs stripped out before adding restaurant meals into the BLS services category?

2)Your thoughts on the cause of the decline?

Rycoka

July 15, 2008 05:56 PM

I like Joe's comments about real estate - that has got to have taken a big hit. The main factor in the decline of service industry costs has got to be people - less people being employed to do the same work, or people being paid less. The scary thing indicated by this chart is that "things" are becoming more expensive and people are becoming cheaper.

Dominic

July 15, 2008 07:01 PM

Michael

You mention that the BLS producer price index for “traditional service industries” includes: information, healthcare, finance, real estate, legal services, architecture services, management consulting, advertising, employment services, waste collection, computer training, amusement parks, golf courses, fitness centers, hotels, and a few other categories.
Well what is the weight of each category in the index??
For example, healthcare is going up (significantly) no down, I doubt decent legal services are getting cheaper, the rates for my utilities, including waste collection, went up just in the last 3 months.
Certified plumbers, electricians, car repair services are not getting cheaper for sure.
I have no doubts anything related to real estate and (up to a point) in finance is subjected to downward pressure right now; I can hire lots of out of work middle manager as "business management consultants" very cheaply, even blue chip consulting firms are offering 50-60% discount (unless are healthcare or government related projects...wink wink) in order to get work, IT professionals in several categories are a dime a dozen since the 2001 crash (skill shortage....riiiight!!) and so on.
I would probably say that the non indispensable services are getting cheaper to a various degree.
The same is not true for the indispensable ones, especially if there is a "commodity" component priced into it.
In the end I still have to fill my gas tank, buy food, clothes and other items...and I can guarantee you that overall prices are going up rapidly even if the service component of them is going down.

cm

July 15, 2008 11:15 PM

Dominic already hints at it, it's a matter of how discretionary a good/service is.

With "indispensable" services, the only thing that puts a limit on prices is lack of full price discrimination, that is while providers are not necessarily charging everybody the same price, they are charging the same price to large groups of customers (even when prices are not advertised to the public, there is still a concept of "going rate"). That means prices are determined by approximately the median purse size in each customer group.

Strictly speaking it's the same with discretionary goods/services, but they are second in line, and have to compete over "discretionary" funds.

I think we can safely expect healthcare, transportation/automotive, food, shelter, etc. to stay expensive relative to incomes.

Mike Mandel

July 16, 2008 07:52 PM

Dominic:

Well, your guess was right. The inflation rate for "motor vehicle maintenance and repair", and "repair of household items" have both risen.

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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