The inflation nightmare continues to worsen: producer prices are exploding. Inflation Mindset Rules

Services PPI and Core PPI peak.

By Wolf Richter for WOLF STREET.

The producer price index for final demand rose 1.4% in March from February and 11.2% from a year ago, both the largest peaks and the worst year-over-year data dating back to 2010, the Bureau of Labor Statistics said. today. After being stuck around single digits for four straight months, producer price inflation has now erupted – to use a stock market term.

Final demand PPI tracks input prices for consumer-facing industries whose selling prices are lifted in the coming months by the Consumer Price Index which yesterday WHOOSH already hit 8.5 %. The PPI final demand shows what is in store for the CPI in the coming months. And there’s no ‘softening’ in store, and it’s the PPI for services that has now started to skyrocket.

For 15 months, producer prices have continued to climb. Five straight months of double-digit producer price inflation is something. And today’s escape is remarkable.

Excluding volatile food and energy costs, the core PPI jumped 1.0% in March from February and 9.2% year-over-year, the highest of the data , after increasing relentlessly since the end of 2020:

And services! The producer price index for final demand services rose 0.9% in March from February and 8.7% year-on-year, the highest in data dating back to 2010 .

What businesses along supply chains have realized is that they can pass cost increases on to the next business and to consumers. And consumers have eagerly played along, having gone from being pretty shrewd buyers and price buyers to paying anything. The inflationary mentality has taken over.

This inflationary mindset suddenly blossomed and flourished due to two huge, unprecedented factors:

  • The Fed’s reckless monetary policies of repressing interest rates and printing $4.8 trillion in bills, triggering huge asset price inflation and the purchasing power it entails;
  • The government spread $5 trillion in borrowed money across the country in just 24 months.

Under this flood of money, leading to the most grotesquely overstimulated economy of all time, price no longer matters, and everyone understands that.

Price increases move through the economy in uneven waves, with the costs of some goods and services rising while others might be flat or even falling, and a month or two later the prices of other goods and services rise in a game of inflation Whac -A mole.

And companies realized that not only could they pass on the higher costs, but under the guise of the burgeoning inflationary mindset, they could pass on far more than the extra costs, leading to huge margins. beneficiaries.

Companies always charge the maximum price they can, constrained only by their desire to meet their sales targets. When price resistance among their customers sets in, companies debate whether to roll back those price increases to boost volume or keep raising prices until some sort of ceiling is reached. With online shopping, this equation is now recalculated in real time and continuously.

What has changed from 2019 is that buyers are now infected with the inflationary mindset and are now able and willing to pay anything, instead of pushing back. This decline puts a damper on price increases – and therefore on broader inflation. But that pushback has now been broken by consumers throughout supply chains. The whole price dynamic has gone awry.

We have seen that a ceiling has now been reached for used cars where prices have climbed 40% and buyer resistance has set in, and industry-wide sales volume is now in down despite abundant supply. But in other products and services, buyer resistance has yet to be met. And even if the price of one product encounters resistance, the price of another product goes wild.

And these double-digit increases in producer prices show that even higher inflation is heading towards consumers, and will continue to do so until consumers start to push back, either because they are not more capable, or because they no longer want to pay anything. It’s far from it, and those trillions of dollars are still floating around state and local governments, businesses, and consumers, and they’re going to be spent, although that spending may fall into different categories, such as goods for services.

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