Enjoying the Inflation?  Have Some More…

  • Just when I was going to write on something else, the PPI came out.
  • The Producer Price Index measures what wholesalers get paid for their products.
  • The PPI rose a whopping 9.6%, its highest pace on record.

Happy Hump Day!

We’re at Wednesday now, and I was going to change the pace after yesterday’s lambasting of the Fed.

But then I opened up my Journal app this morning and read the PPI number.

I know newsletter writers are prone to hyperbole and exaggeration, but to say this PPI reading is a disaster is an understatement.

As we did with the Consumer Price Index earlier, I’ll go through the Producer Price Index with you, so you understand what it’s calculating.

But more importantly, it’s essential you understand why it’s such an important reading. Of course, one can argue that its measurement is as flawed as the CPI’s.

Let’s get into it.

Wholesale Prices Matter to Consumers, Too

First, let’s define wholesale prices.

Wholesale prices are the prices producers get paid for their products.  This is usually the “first commercial transaction” for the product.

According to the Bureau of Labor Statistics, the same organization that calculates the CPI:

The Producer Price Index is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser’s perspective.

For example, a woodworker makes miniature Trojan Horses in Athens.

He may sell those Trojan Horses to his nephew, who runs a market stall next to the Acropolis in Athens.

The price the nephew pays to his uncle per wooden horse is the “wholesale price.”

The price an American tourist pays the nephew for a wooden horse is the “consumer price.”

The rate of change of the wholesale price would factor into a PPI measure.

Of course, this is a simple example.  The PPI, like the CPI, takes into account many thousands of products.

So What Happened?

​​Since PPI measures the costs of producing goods, and commodity and food prices directly affect consumer pricing, PPI is a good indicator of inflationary pressures.

Credit: The Wall Street Journal

Or, in this case, the PPI can be seen as a confirmation of heavy inflation already underway.

What Gives?

That producer prices spiked isn’t much of a surprise.

That they rocketed higher than consumer prices may rattle some.

The usual culprits were to blame: food, energy, and transportation and warehousing.

None of those is a big surprise.

Sure, we’ve got supply chain issues.  We also have a central bank financing most of the Treasury’s bond issuances and refusing to raise rates to combat inflation.

But one thing the PPI will pick up sooner than the CPI is wage inflation.

It costs more to hire people nowadays.

And I think this trend will continue.

Funnily enough, the Fight for $15 is not helping on this front.

Before you think I’m against low-income earners getting pay raises, I’m not.

But what I won’t do is buy a $5 cup of coffee when I can make it in my house for $0.50 per cup.

Some will still go to Starbucks – which now has its first union – a bit less.  Maybe they’ll only buy two cups there instead of their usual 3 cups.

Those flush with cash and love Starbucks will eat the rising cost.

We can’t predict these sorts of things.

But we can predict that producers will try to pass on some of these rising costs to consumers.

Ultimately it’s up to consumers to decide whether they’ll continue to pay.

In his masterpiece, The Theory of Money and Credit, Ludwig von Mises wrote the following:

Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and ‘expansionist’ monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement.

But the same governments and their henchmen have indicted business for the inevitable consequences of inflation.

While advocating high prices and wage rates as a panacea and praising the Administration for having raised the ‘national income’ (of course, expressed in terms of a depreciating currency) to an unprecedented height, they blamed private enterprise for charging outrageous prices and profiteering.

While deliberately restricting the output of agricultural products in order to raise prices, statesmen have had the audacity to contend that capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of everything.

And millions of voters have swallowed all this.

There is need to realize that the economic policies of self-styled progressives cannot do without inflation. They cannot and never will accept a policy of sound money. They can abandon neither their policies of deficit spending nor the help their anti-capitalist propaganda receives from the inevitable consequences of inflation.

It is true they talk about the necessity of doing away with inflation. But what they mean is not to end the policy of increasing the quantity of money in circulation but to establish price control, i.e. futile schemes to escape the emergency arising inevitably from their policies.

Yes, Mises used the term “progressives” in 1953.  They were a nuisance back then, too.

The simple truth is that inflation not only raises prices and wages, but it also raises costs as well.

That’s why it’s ultimately a futile endeavor for the whole.

The good news is that pretty soon, you’ll be driving a $500,000 car.

The bad news is that it’s going to be a Chevy Spark.

Until tomorrow.

All the best,

Sean

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