Service Sector Inflation Ticks Up

Posted by: Michael Mandel on November 17

The headline number for this morning’s PPI report was an 0.6% decline in the price of finished goods less food and energy (“core PPI”). In fact, core finished goods PPI has fallen for 4 out of the past 6 months. So if we just look at this number, inflation seems like it isn’t a problem,

However, I prefer to look at a different statistic in the PPI report—the PPI for traditional service industries. Never heard of it? You are not alone. Starting a few years ago, the BLS aggressively broadened its coverage of the service sector. In particular, the “traditional service sector” includes everything from telecommunications and web search portals to health care to banking to management consulting to fitness centers.

So now the BLS publishes a PPI for these service sector industries (it’s at the back of the report, pp 20-21). I wrote about the service sector PPI on my blog in February, in a post entitled “The PPI says: Service Sector Deflation is Almost Here.”

Now, we have a really big divergence in the path of the core finished goods PPI and the service sector PPI. Core goods inflation is collapsing. But services PPI is slowly ticking up.

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I think the service sector PPI is a better measure of the underlying inflation rate, because it covers a broader swathe of the economy. So this chart tells us that inflation is slowly starting to recover.

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Reader Comments

Rycoka

November 18, 2009 05:57 AM

Hmm...standout figure for month on month growth is "Security, commodity contracts and like activity". Looks like the bankers have their snouts back in the trough.

Richard

November 18, 2009 02:12 PM

I prefer to look at a different number in the PPI numbers that shows trend, i.e. I look at the year over year all-items PPI change from September to October. It jumped upward a whopping 280 basis points from minus 4.27% to minus 1.91%. If that trend continues year over year PPI inflation will pop positive in December's statement. To determine CURRENT PPI inflation, i.e. first derivative inflation, I look at the change in PPI from its trough in December 2008 to present. It changed from 164.7 to 174.2 in ten months for an annualized percentage of 3.18%

Kartik

November 19, 2009 01:27 AM

Barely hitting 0.5% is hardly news, other than the fact that deflation is not a threat.

I wouldn't worry until it got to 4.0%.

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December 5, 2009 08:01 PM

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December 5, 2009 08:01 PM

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Andrew

February 5, 2010 11:53 AM

Fed to give away more money to control inflation

Inflation is the biggest threat to the US economy how. By definition, inflation is the expansion of the money supply and that's what's going on right now. We're seeing freshly created money going to wreak havoc on the American people.

Deflation is not a threat. It reminds me of the old Chico Marx joke, "Who are you going to believe? Me? Or your own eyes?"

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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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