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Misreading the Inflation Data

Posted by: Michael Mandel on August 19

I figured I’d do the previous post a different way. Today’s PPI report contains data on both goods and services. The only one that anyone ever quotes is the goods side of the economy. But here’s both on the same chart. The top line is the year over year change in the PPI for finished goods, less food and energy. The bottom line is the year over year change in the PPI for the ‘traditional service industries.’


Based on this chart, is it more correct to say that a)inflation is accelerating or b) inflation is decelerating?

(you can tell that I’ve spent too much time finishing up my textbook).

Just for fun, here’s another chart. This is the year over year change in hourly earnings, based on all employees (the new index from the BLS). I don’t see any inflation here either.


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Reader Comments


August 19, 2008 04:59 PM

The BLS does not offer up an easy answer regarding what proportion of the economy is represented by these two subsets. To the best of my knowledge, all services are in the neighborhood of 80%, and I would guess that the so-called traditional services represent a significant portion of that. Even more interesting than the dollars would be the number of jobs -- again without firm evidence, I would guess that a huge proportion of jobs are found within the traditional services, maybe 3 or more times the number tied to goods. It would be no surprise since, as you have pointed out, real wages are dropping and one would assume that the major input for service is labor. What it really reveals about economic policy, though, is beyond me -- is it a bizarre plan, or is it a plan gone awry? One could almost imagine that it is a well thought through scheme to get people in the U.S. to consume less and thus save some resources for the rest of the world and for the future. Surely not, but such thoughts are bound to occur in an economy that so lacks transparency. It certainly confounds one's hopes of arriving at a rational scheme for managing risk.


August 19, 2008 07:01 PM


What is the weight in the service inflation basket for each activity??
If, what I defined "indispensable" services where inflation is alive and well, as we discussed before, are underepresented then the whole picture is a bit compromised.

Let's not forget that even service companies rely, ultimately, on sales of tangible goods.
Unfortunately, in our case,these goods are manufactured abroad.

Google makes its money from advertisers that, in turn, hope to attract people to buy their wares..there is no way out of it..are we really a service economy which can run independently from physical goods?? I think not...

It would be interesting to see, if we could put our hands on reliable data, What is the services inflation rate in Asia where the economy is more based on physical goods (the factory of the world) compared to their goods inflation rate...

Unfortunately we generate inflation with our money printing, we "export it" in Asia where they run their own printing presses to avoid excessive currency revaluation, their economy overheat and inflation get somewhat "amplified" (disclaimer: Asian inflation rate, except for Japan, is higher also because there is a higher food component in their basket) and we reimport it here.

We keep printing and debase our dollars but we do not accomplish nothing in terms of gained competitivity because the Asians do exactly the same keeping their cost advantage (and overheating their economy in the process) and the trade unbalance....unfortunately our workers have no bargaining power when the inflation "come back" on our shores...

Mike Mandel

August 20, 2008 09:15 AM


The real question here is Fed policy. Should the Fed be scared of inflation and raise rates? I don't think so.


August 20, 2008 10:14 AM

Why do we pay more attention to durable goods orders than nondurable goods orders? Because they are more cyclically sensitive, though a smaller portion of total PCE. Same for finished goods vs. services inflation: though our economy is largely a service-focused one, a broad-based increase in the prices of goods does more to inspire both a possible wage-price spiral from unanchored inflation expectations (which you correctly note hasn't yet happened) and/or a more delicate balance of monetary policy for the Fed. That's why we're worried about the goods-side PPI/CPI/PCE index.


August 20, 2008 10:39 AM

Hmmm. My paycheck goes toward mortgage, home maintenance costs, fuel, food. Whatever is left might go toward entertainment - like eating out. Of course I have to drive. So, I'm finding less and less of my paycheck left over for m 401K.

Services are getting cheaper - wait a minute! - I'm in the service sector, and my PAYCHECK IS GETTING REDUCED. So, I'm getting paid less, but paying more for goods. That's REALLY BAD, and not a "wash" as our author tries to point out.

Ummm, this guy is an economist?

Mike Mandel

August 21, 2008 10:45 AM


Yes, it's bad. No doubt about it. That's why the Fed needs to cut interest rates, rather than raise them.


August 21, 2008 10:50 AM

Chad makes an excellent point. Michael,
you describe "an economy increasingly dominated by services" Home maintenance costs are services, but I don't see the effects of falling inflation there, and his mortgage, which is probably constant, he spends his money on goods.
What components of services have low inflation? Not healthcare. Perhaps the numbers are distorted by quality improvements and increased productivity in information processing.


August 21, 2008 04:58 PM

In a global economy, the wages of many low and mid-level service jobs have to converge across borders.

In India and China, inflation is at double digits. In the US, service sector wages are falling to reduce the delta between India and China. This is good for the world in aggregate (i.e. an increase in global prosperity), but bad for a big slice of Americans.

The bottom 60% of the US workforce can expect falling real wages for the next decade (after 2020, more parity will be reached with India/China in service jobs, allowing for rises across the board after than time). The top 25% is the only group that will continue to see real wage increases.

Slowing inflation in health-care costs is coming. Read why here :


August 21, 2008 06:49 PM

Mike Mandel, what part of getting back to living within our means don't you understand? I think we agree that we have lived beyond our means to the tune of 3-4 trillion dollars in the last decade, so the adjustment to living within our means will be painful, no doubt about it!! There is just no free lunch and debasing our currency in order to try to keep our current consumption level going is not the answer!! Certain things will be more expensive and we will have less disposable income in the future, as we bring our consumption down to align with what we produce.


August 21, 2008 07:04 PM


As I mentioned in one of my replies, I suspect the services not really indispensable are experiencing low inflation..the kind of activities you can postpone and the "frothy" ones.
Michael found a little piece of anecdotal evidence in the car repair and household repair services which both experienced higher inflation.
I add another little nugget of evidence: I'm a good friend of two excellent carpenters, their business (re-modelling and new building construction) is extremely slow even offering heavy discounts and they decided momentarily to switch to re-siding and roofing which, instead, is experiencing strong least around here.


August 21, 2008 07:57 PM


Yep..the Bernanke is in a bad fix.
If you want my opinion, the Fed should raise rates to restore confidence in the dollar.
In the long run we would boost so much needed savings, attract more investment from abroad and seriously cripple the run-up in commodity prices.
Would we go through a serious recession in the process?? You bet we would..I'm sure you remember the Volcker years...
Let the Asians do the heavy lifting this time and develop a more robust, deep rooted and durable consumer economy, rebalancing world trade...we just cannot be the consumer of last resort anymore.
Congress in turn could really boost the economy helping to create milions of infrastructure jobs, for example: Fixing the roads, developing a world-class railway network like other advanced countries, wiring the country for real high speed internet (for example the last mile broken link), encouraging the formation of new urban centers reducing congestions, fixing the health care mess, increase investment in science, new energy sources, etc...
Long term vision. Incease real national productivity substantially.
Mailing to people tax rebate checks so we can send even more money to China is not going to solve's like treating a gaping wound with a band-aid...but maybe some politician can get re-elected....
If the Fed lower their rates now, we would end up with even more horrifying inflation...right now our money printing is going directly into commodities and other out-of-the-dollar assets, bypassing equities and real estate because world markets do not want to hold dollars so they take refuge elsewhere..let's not get fooled by the recent retreat..commodities are rising again.
If we run our printing presses even more, rest assured the Asians (China in the first place), with their currency pegs, will follow, their economy will further overheat and markets will take even more refuge in alternative asset classes (read mainly commodities)...results? A tsunami of inflation with our labor force powerless...
Unfortunately the Chinese, with their economy firing in all cylinders, (Manufacturing, services, infrastructure) actually overheating as we said before, and already being used to deal with an authoritarian government to being with, have higher tolerance to pain (inflation in this case) compared to us.


August 21, 2008 08:31 PM

I don't think the Fed should cut rates. That would be a "here we go again" situation.

The current 2% is appropriate. It should stay until there is a recovery, no matter how deep the short-term pain is.

Rates have been low for 5 months, and a 'stimulus' package was delivered. Now, the best thing that can be done is just wait it out. Any other artificial actions will merely postpone the problem.

Brandon W

August 22, 2008 03:20 PM

Simple. The main cost in services is labor. Cut labor costs and you can hold the line on service prices, even as the quality of those services decline (have you tried to get anything done, or get anyone real on a phone, lately?). Just keep cutting employees, cutting wages. Which is fine until no one has enough income to pay for the "uninflated" services. Maybe we're into a downward spiral of an economy based on selling cheeseburgers and life insurance to one another.


August 24, 2008 07:12 AM


I'm sure real estate sales service has dropped by about 30% or maybe more. If a home value fall, the commission falls too. Also, agents are competing more with other agents and some might be tempted to lower their rate.


August 25, 2008 05:31 PM

Well said Dominic.

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



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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