December Producer Price Index Predicts Stagflation In 2024

Goods Prices Are Deflating. Service Prices Are Inflating. Prices Remain Distorted.

Corporate media wants you to believe the December Producer Price Index shows cooling inflation and the Fed’s “soft landing” for the economy right on target.

The Producer Price Index for final demand fell 0.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved down 0.1 percent in November and 0.4 percent in October. (See table A.) On an unadjusted basis, the index for final demand rose 1.0 percent in 2023 after increasing 6.4 percent in 2022.

The December decrease in the index for final demand is attributable to a 0.4-percent drop in prices for final demand goods. The index for final demand services was unchanged.

The index for final demand less foods, energy, and trade services rose 0.2 percent in December after edging up 0.1 percent in both November and October. Prices for final demand less foods, energy, and trade services climbed 2.5 percent in 2023 following a 4.7-percent increase in 2022.

Factory gate prices are still rising, which means consumer paychecks are still shrinking, but it’s all good, because the Fed’s got inflation under control! At least, that’s what the corporate media wants you to believe.

U.S. producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, suggesting inflation would continue to subside and allow the Federal Reserve to start cutting interest rates this year.

The report from the Labor Department on Friday also showed prices for services were unchanged for the third straight month, another boost in the U.S. central bank's fight against inflation. With supply chains mostly normalized after severe disruptions during the COVID-19 pandemic, services are now at the core of the inflation battle. Services inflation, partly driven by a tight labor market, is less responsive to rate hikes.

"The inflation pipeline is clearing and consumer prices will gradually get to the Fed's 2% target," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

How about we let reality set in for a moment and see where that leaves us? Once again, we must unpack the data to see if this rose-colored glass view of things withstands scrutiny (spoiler alert! It doesn’t!).

Wall Street began Friday by believing the corporate media narrative on the PPI. Equities rose at first, while Treasury yields fell.

However, reality soon set in for Wall Street as well, with both equities and Treasury yields retreating as the implications embedded in the data became apparent. So much for the corporate media narrative which jumped out of the starting gate early on Friday touting the surges but not the retreats.

Markets reacted positively to the PPI release, with stock futures shaving losses and Treasury yields mostly lower.

Corporate media wants everyone to believe that all is coming up roses and that the Federal Reserve is on track to cut interest rates at long last.

Markets are convinced that waning inflation signs will push the Fed to cut interest rates starting in March, even with inflation above target.

Judging by the late morning trends on Wall Street, no one is really buying that narrative any more.

Even the optimistic corporate media narrative on producer prices can only go so far, and it certainly is not stretching far enough to cover Dementia Joe’s deluded comments on how well his regime has done on inflation.

President Biden celebrated the December inflation report as a sign of progress in fighting high prices, even as the data suggested the road back to normal could be bumpy.

"We saw prices go down over the course of the year for goods and services that are important for American households, like a gallon of gas, a gallon of milk, a dozen eggs, toys, appliances, car rentals, and airline fares," Biden said in a statement on Thursday. 

The White House is conveniently overlooking the reality that disinflation only means prices are rising more slowly than before. It does not mean those same prices have come down.

While inflation has fallen considerably from a peak of 9.1% notched during June 2022, it remains well above the Federal Reserve's 2% goal. And when compared with January 2021, shortly before the inflation crisis began, prices are up a stunning 17.6%.

"In the two-steps-forward-one-step-back inflation battle, December was a clear step back," said Robert Frick, corporate economist with Navy Federal Credit Union. "Shelter prices accounted for half the increase, and there’s little relief in sight there as rents prove sticky and homeownership costs rise. Consumers felt the most immediate pain in December from higher food and energy prices, and those are the two commodities Americans are most sensitive to."

If we look at the broad PPI, we see that, at the index level, prices are indeed coming down for the headline index as well as for PPI less food and energy.

PPI less food, energy, and trade services, however, actually ticked up at the index level.

However, even with the recent declines in the overall Producer Price Index, even factory gate inflation has been rising faster than worker paychecks.

Since the start of 2021, the overall PPI has risen 16.8%, PPI less food and energy has risen 15.6%, and PPI less food, energy, and trade services has risen 13.5%. Average weekly earnings in the private sector, however, have risen only 12.2%.

Not until the latter half of 2023 does wage growth outpace factory gate inflation.

From 2021 through June 2023, workers have steadily lost ground even to factory gate inflation. That’s the “Bidenomics” Dementia Joe wants to celebrate.

Moreover, although the overall indices are declining, year on year changes show that year on year factory gate inflation, like consumer price inflation on Thursday, has actually been trending up since mid-summer.

The core factory gate inflation indices have broadly been trending down, but the headline index is heating up again year on year.

In some respects, this is merely an artifact of comparing price levels today to price levels 12 months ago. Certainly the month on month percent change for the PPI is also printing deflation. Only the PPI less food, energy, and trade services is printing recession and stagflation.

The dichotomy comes about because prior months’ inflation rises have been large enough that even the past few months of month on month declines are not enough to overcome the longer 12-month trend.

Moreover, in the PPI less food and energy, December’s month on month deflation percentage was less than November’s. For the PPI less food, energy, and trade services, December returned once more to inflation rather than deflation.

We should not lose sight of the reality that the PPI has been showing inflation all year, and it is only the past few months where headline PPI has been printing month on month deflation.

One factor which will continue to work against falling factory gate prices is the fact that food and trade service prices, while trending down, rose far above the headline index until the end of 2022, and remain significantly elevated above the headline index.

As with consumer prices, there are segments within the subindices where the trends are moving against the headline index.

Most notably this is happening with construction prices.

Simply put, construction costs are not coming down at all. Even service prices are only receding slightly compared to either goods or headline factory gate inflation.

To be sure, construction prices have largely plateaued, and that has meant that year on year inflation has come down.

While year on year inflation in construction has declined, since October even that trend has flattened out, suggesting construction prices are preparing to increase again. Factory gate inflation for goods, while having been in year on year deflation for most of the year, has been trending back towards the zero line and renewed inflation.

Month on month inflation numbers tell a broadly similar story. Factory gate deflation for goods is shrinking and moving towards outright inflation, as is the case with factory gate deflation for services for the past two months.

The net result going for these trends in factory gate prices is that the current declines are likely to end, and PPI inflation will return across the board.

We should also discuss energy prices and what the future holds there.

Since June of 2022, energy prices have been trending down.

Particularly in the past few months, that trend has percolated through to the month on month percentage changes.

However, we should not presume this trend will continue much longer. The widening conflicts in the Middle East have resulted in a short-term upward trend in oil prices since the beginning of the year.

This does not mean energy prices are poised to soar just yet—the longer term trend in oil prices is still very much downward (much to the chagrin of OPEC and Russia).

At the same time, with the US and the UK now actively taking out Houthi missile and drone sites, there is a growing change that long term trend will reverse and we will see significant increases in oil prices, which will quickly end energy price deflation in the US.

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If energy prices return to inflation, the overall PPI and the overall CPI will quickly move significantly higher. The larger portion of the decline in headline inflation in both the PPI and the CPI is attributable to energy price deflation. As the minimal progress on service price inflation shows even at the factory gate level, deflationary pressures beyond energy are minimal and problematic at best—which is why we are constantly looking at a stagflationary scenario.

Thus we see once again the flaw in the corporate media narrative. The PPI is moving down, but it is doing so largely because of a steep decline in energy prices. Strip out the volatile food, energy, and trade services elements, and the PPI once again shows inflation and not deflation.

With energy prices hinging on what happens next in the Middle East, the argument that inflation is likely to continue to cool is risible and ridiculous. The more the conflicts in the Middle East expand the more likely oil prices will rise, and the more that oil prices will rise.

The most probable expectation for the near term on inflation, both at the factory gate level and at the consumer level, is that inflation is likely to “bottom out”—and to do so well above the Fed’s Holy Grail of 2%. Whether inflation moves significantly up from there is not at all certain, but it also not at all improbable.

Corporate media and Wall Street want to believe inflation has been “beaten” so that the Fed will have no choice but to move interest rates down. However, the PPI, like the CPI last Thursday, is a reminder once again that inflation has not been beaten, that it has not left the stage, and that it is not likely to leave the stage in the near future. The PPI, like the CPI last Thursday, is a reminder that inflation is continuing to distort relative prices, and continues to move the US down an uncomfortable path of stagflation and ongoing recession.

Which means that the PPI is telling us that Wall Street is likely deluding itself if it expects the Fed to move rates lower any time soon. So long as inflation resists getting to 2%, the Fed is handcuffed to the idea of keeping interest rates higher.

Do not look for assurances within the PPI that either inflation or the economy as a whole will improve to start 2024. Those assurances are not to be found anywhere in that data.