Producer Prices Hint of High Inflation

The Bureau of Labor Statistics has released its Producer Price Index, PPI, for February:

The Producer Price Index for final demand increased 0.5 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 1.3 percent in January and 0.3 percent in December. … On an unadjusted basis, the final demand index moved up 2.8 percent for the 12 months ended in February, the largest increase since rising 3.1 percent for the 12 months ended October 2018.

But the BLS does not report the big news in their PPI numbers: the raw-data index – not adjusted for seasons – increased by a full six percent over February 2020. This is the largest year-to-year increase for any month since 2011.

Normally, there would be no reason to put this increase in a broader context of inflation, but the current economic environment is such that this PPI increase is cause for concern. We explained the details of these concerns on Friday in the latest issue of our Liberty Bullhorn Economic Newsletter, showing how producer prices translate into consumer-price inflation. (Get a subscription today – only $2.99/month – and read all about it!) For now, let us note that the Consumer Price Index for February was up 1.7 percent on an annual basis. This is by no means an alarming rate, or even cause for major concern, but it follows in the footsteps of a steady uptick since November, and predictably so if we use PPI as a forecasting indicator for CPI.

At the same time, a number of other variables affect consumer prices, one of them being monetary expansion. For this purpose, we could have reported on the continued state of this monetary expansion, but the Federal Reserve has not released any M1 weekly data since the week of February 1. The latest news release in that series is dated February 23. The Federal Reserve changed the definition of M1 last spring; as announced in their most recent H6 News Release:

As announced on December 17, 2020, the Board’s Statistical Release H.6, “Money Stock Measures,” will recognize savings deposits as a type of transaction account, starting with the publication today. This recognition reflects the Board’s action on April 24, 2020, to remove the regulatory distinction between transaction accounts and savings deposits by deleting the six-per-month transfer limit on savings deposits in Regulation D. … This action increases the M1 monetary aggregate significantly while leaving the M2 monetary aggregate unchanged.

As a result, any review of M1 data will produce a highly anomalous rise in M1 early last year, coinciding exactly with the beginning of the monetization of deficits.

We have in the past reported M1 data prior to the date when this definitional change went into effect:

Figure 1

Source: Federal Reserve

The M2 definition has not changed, but neither M1 nor M2 is currently being updated. Hopefully, the reason is that the Federal Reserve is updating its entire database, making the same definitional changes to its historic M1 as it did last spring to the current series.

Until we get another update from the central bank, Figure 2 reports a longer series of M2 data, putting last year’s enormous monetary expansion in perspective:

Figure 2

Source: Federal Reserve

It is inevitable that this kind of money printing causes inflation; as we explained in a Special Report in January, those who claim otherwise with references to Modern Monetary Theory, are wrong.


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