On Monday, Justin Ho at Marketplace had a piece on manufacturer pricing. He answered several interesting questions, including the results of the PPI rising faster than the CPI:
That added pressure [from higher input prices] puts businesses in a tough spot, according to Matthew Miskin, chief investment strategist with Manulife John Hancock Investments.
“They can get lower profit margins, or they have to pass this on to consumers,” Miskin said. “And the question becomes, ‘Can consumers afford that higher price point?'”
That’s why inflation at the producer level can eventually hurt consumers – especially in grocery stores, toothpaste, and other consumer staples.
“These are very low-income businesses, so they don’t have much chance of overcharging,” said Miskin.
PPI is less well understood than CPI, so it proves that there are many PPIs – for different goods and different stages of production. The most commonly reported is PPI of final demand (PPIFIS, net PPIFES, total). The BLS provides a primer on some common misconceptions about PPI. Even considering the final PPI requirement, coverage and weights vary. Shelter is a major part of CPI that is not in PPI.
Here is a time series plot of CPI ex-shelter and core PPI, which should be somewhat similar in coverage.
Figure 1: Core CPI ex-shelter (blue), for core PPI (red), in logs 2025M01=0. Source: BLS via FRED.
PPI has been trending higher than CPI for a long time (ie, PPI inflation outpaces CPI inflation). This may seem to have consequences for the costs of companies in the long term, despite the fact that the supply is still different at this level – especially the import prices are not included in the PPI (estimating the prices received by domestic firms). This point is underscored by a recent Royal Bank of Canada memo:
If the PPI is rising faster than the CPI, this suggests that producer prices are rising faster than consumer prices. For example, a commercial baker may charge more for bread if wheat prices rise, but a local cafe that buys bread from a bakery may not adjust menus to reflect higher prices.
If we see PPI exceeding CPI for a longer period of time, then retailers are likely to raise prices; otherwise it can mean a problem in the profit of the business.
Obviously, because of aggregation problems, that logic doesn’t apply to rates, but it may apply to changes in PPI and CPI rates.
Figure 2: Three-month annual inflation rates for CPI ex-shelter (blue), for core PPI (red). Source: BLS via FRED.
Core PPI is rising faster than core CPI ex-shelter in Q/Q – so this suggests pressure on cost margins – without the role of imports… and labor costs.
There is an index of the business profit ratio from PPI – commercial services in high demand (comparing the sales and purchase prices, at the prices of the domestic producer):
Figure 3: PPI – final trade demand services (blue scale, left), ratio of the former reference CPI to the core PPI (red scale, right). The NBER described the worst recession days as gray. Source: BLS, NBER, and author’s statistics.
There is a strong (inverse) correlation, but not strong, especially in the last year.
