KEY DATA: PPI: +1%; Goods: +0.6%; Goods Ex-Food and Energy: +1%; Services: +1.1%/ Claims: -12,000
IN A NUTSHELL: “Wholesale price pressures continue to build and that argues for firms continuing to use their pricing power to overcome those rising costs.”
WHAT IT MEANS: Hey people, inflation pressures are not fading just yet. The Producer Price Index posted another large gain in July, and that was the case even excluding volatile food and energy. Food was the only major component where costs fell, but the sharp decline was offset by another major rise in energy costs. Price pressures rose significantly in just about every major and minor component and every special index. In other words, increasing producer costs are pressuring businesses in every nook and cranny of the economy.
Jobless claims eased back again last week, and we are slowly moving toward a pace that would be expected in a strong economy. How long it will take to get back to where we were before the pandemic hit is a different issue. Then, the unemployment rate was below what most economists believe is full employment. Now, it is still two percentage points above that record low level, even with the sharp decline in July.
IMPLICATIONS: Is the Fed whistling past the graveyard? Both retail and wholesale prices are rising sharply. Some have argued that the “lower”, i.e., not as huge, increase in consumer prices is the start of the deceleration in inflation. However, it is hard to make the case that the high inflation posted in July is better than the very high inflation we had been seeing. Both are disturbing, to say the least. The wholesale numbers only argue for at least a few more months of high consumer inflation. Firms have pricing power and there is little reason to think they will not continue using it. It has been so long since that was the case, that the conventional wisdom that the high inflation is temporary and we will get back to “normal” inflation without any long-term impacts, has to be called into question. Investors believe that is true and Fed members continue to say the same, though some at the Fed are breaking ranks. My view is that when you combine labor shortages, declining unemployment rates and rising wages with supply chain problems, excess demand and increasing input costs, you have the recipe for an extended period of inflation. Interestingly, if the Fed is going to get back to an “average 2% inflation rate”, then the extended period of sub-2% inflation will have to be offset by an extended period of above 2% inflation. That is where we seem to be headed.