PPI Goods Index is misleading--services inflation falling

Posted by: Michael Mandel on August 19

Yes, I know the headlines say “Wholesale prices rising at fastest pace since 1981.” That’s from Associated Press. All the other online news service—CNN, the NYT, Reuters, Bloomberg—have roughly the same take on this morning’s PPI numbers. I’m sure that BW.com has picked up at least one of these reports as well.

But frankly, the inflation-scaremongers are living in the 1950s. The PPI number that they are reporting consists only of goods, in an economy increasingly dominated by services. And services inflation is falling, not accelerating. Here’s the chart, which shows year over year change in the producer prices for the service sector.

servicesinflation_30751_image001.gif

This is where the real action is happening. In fact, there is a squeeze on prices going on, not an acceleration in inflation.
(traditional service industries include everything from healthcare to information to finance to accomodations. They do not include retailing and wholesaling, or transportation).

[Changed title of post as of 3PM]


TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Dominic

August 19, 2008 03:47 PM

Michael

We discussed this in a similar post here:

http://www.businessweek.com/the_thread/economicsunbound/archives/2008/07/slowing_service.html

This is actually a bad thing (I swear, I'm an optimist by nature)
If goods inflation rate goes up, especially if it does for reasons exogenous to our economy consumer environment and I cannot charge more for my services, I'm in a really tough spot.
As we discussed before, anecdotal evidence, and you confirmed, suggests that "indispensable" services or where there is a component of goods or commodities baked into it actually went up or at least ar enot going down (we were discussing the car repair and repair of household items, remember?) ..What about Healthcare?? Transportation?? (which is not included as you mentioned...but e still need to move people and things around).
Eventually I need to buy goods in our service economy Michael..fill up my gas tank, buy groceries and other items, travel, see a doctor, etc...
I do no really care much if I can hire 3 management consultants or 3 IT workets for the price of one...
For example, I'm sure that we are experiencing horrible deflation rate for the corporate event planning business or the household cleaning services...so what???

Gas is going down at the moment..good..let's see how long it last...

Mike Mandel

August 19, 2008 03:55 PM

Hi Dominic,

I agree with you completely..the slowdown in service inflation is not good news. It shows a squeeze on labor-intensive businesses, and hence on labor. Take a look at my next post, where I also show the slowdown in wage growth.

CT

August 19, 2008 09:14 PM

Why do you feel a decrease in service inflation is relevant when more and more people cannot afford the basic necessities in life: shelter, food, healthcare. Do you really think the consumer-driven part of the economy is spending a significant part of their incomes on services? The prices of services are falling simply because people cannot afford to buy them. Demand for them is down. A large perentage of baby boomers have not kept up their savings rate to match the inflation rate. So their purchasing power is down. (Pensions - down, social security annual increase percentages - slower than inflation, stock market savings - down, those who are invested haven't all been very fortunate to pick the correct segments of the market to keep up with inflation, housing values - down, and the list goes on. (Maybe as a country we all need to go back to the basics of our financial lives starting with a financial education, in junior high school. Every student will one day need these skills, not every student will be required to use every subject in school, but they will all have to understand finance.)

Viking

August 20, 2008 01:34 AM

I agree that service inflation and labor costs are well contained. I take that as good news, because as commodity prices come down, overall inflation will come down quite rapidly, allowing the FED to lower rates further, once that happens. This will allow the economy to start growing at some point from a solid foundation, once the housing and banking debacle has worked itself out. We would be in a lot more trouble if we had rapid service and labor inflation, as well as build into the economy, high inflation expectations.

logic

August 20, 2008 11:35 AM

Commodity prices won't be coming down, except for short term blips. Check out the 10 year trends for all commodities prices from the IMF ( http://www.imf.org/external/np/res/commod/table1a.pdf ). It's not hard to guess why: the world is finite, a sphere bounded in space, but human population is increasing and consumption per person has been rising. It's simple math, and it means that material stuff of all kinds will be more and more expensive.

Viking

August 20, 2008 08:25 PM

Logic, I agree with you that we have finite resources, but it is the job of the central bank to raise interest rates to slow the economy down to bring demand in line with supply. In this cycle that job has largely been done by foreign central banks, as the FED has been too busy bailing out the subprime lenders and Wall street to bother protecting the purshasing power of americans. As a result the world economy is slowing down, giving us at least a temporary break on commodity inflation. I agree with you that if we don't find more sustainable ways to live, these prices will go right back up, once the economy bounces back.

Dominic

August 21, 2008 10:38 AM

Viking

You hit the nail on the head.
We need a currency tied to a commodity (historically that commodity was gold) impossible to manipulate.
Many opponents to this idea argue that such system is too rigid, it doesn't offer the necessary flexibility for a modern economy.
Well, I think we stretched the "flexibility" part of the equation too far.
It is really simple...finite resources matched by a somewhat finite currency system.
Just look at the explosion of the money supply since 1971, when the Bretton Woods system was abandoned.

Mike Mandel

August 21, 2008 10:46 AM

Which commodity? Seems dicey to me.

Viking

August 21, 2008 06:32 PM

You are right, Dominic, if we had a currency tied to gold again it would be safe from the urge to crank up the printing presses by the FED. Anyone can just look at the price of oil in gold vs.dollars since 1971 to see that it is not so much that oil has increased in price, but that we have flodded the world with dollars, thus cheapening their value. Mike, if not gold then we could use a basket of commodities, that are abundant in America, such as grains and coal.

Dominic

August 21, 2008 06:40 PM

Michael

Gold worked very well for centuries.
The Bretton Woods was more of a "gold plated" fiat system.
I understand the concern about flexibility in a currency, this aspect need to be carefully addressed in a new monetary architecture.
One thing is sure, pure fiat money always ended up in a disaster..it's history..the temptation is too great for governments to inflate their way out of crises, problems, pay for wars and make their citizens happy with bridges to nowhere.
People need to re-learn again that there are good times and lean times, the reality of business cycle, recessions actually serve a purpose.
We just cannot print money ad infinitum.
There is a need of a strong link, impossible to alter artificially, between finite resources and money as store of value.
Central banks currency manipulation is a disaster, it interferes with "natural" trade patterns and it can force a country comparative advantage where should not longer exist or it wasn't there in the first place.
I don't know exactly what a perfect new system would be, we can open a discussion here, but one thing is sure: What we have is not working anymore...it is coming apart at the seams.

Rycoka

August 21, 2008 09:21 PM

Hi,
I'm an Australian living in Canberra and I'm just recovering from the shock of buying my first packet of potato chips that is the same price but in a "new" smaller packet. Cleverly the manufacturers have included a piece of advertising on the packet that says the product contains 25% less cholesterol. Of course it does! It contains 25% less chips! Ho Ho.
Anyway. I had a stray thought the other day and I thought I'd float it. Has anyone modelled the economy angainst demographics, and if so what are the results? Could we suffering from a baby boomer induced bust? Is what we are seeing at the moment the effect of baby boomers losing power (this must be starting now)? Are we seeing the inevitable result of a population bubble bursting?

Kartik

August 25, 2008 02:33 PM

"Are we seeing the inevitable result of a population bubble bursting?"

YES, which is why only a fool would buy a home in any Western country at this point.

The first baby boomers reach 70 in 2016, while the median reaches 70 in 2025. Thus, only after 2025 can we say that their slowing down is behind us. Thus, the present real-estate bust will not see an upturn for another decade or even two. I use 70 instead of 65 due to increased longevity and delayed retirements of high income earners.

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

 

About

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.

BW Mall - Sponsored Links

Buy a link now!