Friday, August 10, 2018

Yet again - inflation outpacing wages. But even worse, it's uneven.

With trade wars looming over the cost of production, (this week’s) Producer Price Index and Consumer Price Index reports was a bit more intriguing than normal, to see if inflation was creeping up, or if deflation from surpluses were hitting certain goods.

While the headlines indicated producer inflation softened in July, CBS Marketwatch’s Greg Robb said it was really more of a mixed bag.
The producer price index was flat in July, the Labor Department reported Thursday. That was below the MarketWatch forecast of a 0.2% gain.

Another measure preferred by economists, known as core PPI, rose 0.3% for the second straight month. The core rate strips out food, energy and trade margins.

The flat PPI reading pulled the 12-month rate of wholesale inflation down to 3.3%. The 12-month rate of core PPI advanced 2.8% in July, just below the record high of 2.9% reached in March.
Why the disparity? Because energy prices stopped going up this Summer, and declined by 0.5% on the producer side last month.

What also grabs you about the Producer inflation report is how some areas are having major price pressures, while others are having prices decline, likely in part due to the trade restrictions leading to surpluses back here in America.
The index for unprocessed goods for intermediate demand moved up 2.7 percent in July, the largest rise since a 3.6-percent advance in January 2017. The July increase can be traced to prices for unprocessed energy materials, which jumped 8.6 percent. In contrast, the indexes for unprocessed foodstuffs and feedstuffs and for unprocessed nonfood materials less energy fell 2.0 percent and 1.2 percent, respectively. For the 12 months ended in July, prices for unprocessed goods for intermediate demand rose 8.2 percent, the largest advance since an 11.0-percent increase in November 2017.

…Leading the July increase in the index for unprocessed goods for intermediate demand, crude petroleum prices advanced 14.1 percent. The indexes for natural gas, fresh fruits and melons, slaughter steers and heifers, corrugated wastepaper, and coal also moved up. Conversely, prices for hay, hayseeds, and oilseeds dropped 14.0 percent. The indexes for corn and nonferrous scrap also moved lower.
Oilseeds are better known as soybeans and related seeds, and of course, soybeans have been a target of countermeasures to Trump’s tariffs, and unprocessed wheat, corn and hogs all have had drops in intermediate prices between 11.9% and 13.0% in the last year. And farm futures don’t make it seem like things will get better for farmers in the coming months.

On the flip side, final demand products like plywood (+22.5%) softwood (+19.5%) and “building paper and boards” (+14.0%) all have had sizable price increases in the last 12 months, which has to be bringing up the price of construction sooner than later. Also, note that tariff-affected products like aluminum mill shapes (+17.8%) and steel mill products (+12.4%) have had big price increases in the year before any tariffs from overseas hit.

For these products, the questions now become “who eats it”? The assembling factories, the stores (who will have their profit margins cut), or the consumer (who ends up paying more)?

The answer seems to be "both stores and consumers" so far, as today's CPI report showed another increase in July, but a relatively small one outside of the cost of shelter, which keeps straining home affordability in 2018.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in July on a seasonally adjusted basis after rising 0.1 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.9 percent before seasonal adjustment.

The index for shelter rose 0.3 percent in July and accounted for nearly 60 percent of the seasonally adjusted monthly increase in the all items index. The food index rose slightly in July, with major grocery store food group indexes mixed. The energy index fell 0.5 percent, as all the major component indexes declined.

The index for all items less food and energy rose 0.2 percent in July, the same increase as in May and June. Along with the shelter index, the indexes for used cars and trucks, airline fares, new vehicles, household furnishings and operations, and recreation all increased. The indexes for medical care and for apparel both declined in July.
By itself, the increase doesn't seem like much, but it continues a trend where prices over the last 12 months keep increasing at a faster rate. And that's true for both total CPI, and the "core index", which hit its highest point in nearly 10 years at 2.4%.

And some of those price pressures we saw in the PPI hit in the CPI as well. Dairy prices dropped by 0.6% overall in July, with milk down 0.8% and cheese down 1.0%. Pork prices have dropped in each of the last 3 months, including 0.3% last month, and are down 1.3% for the last year. These drops in certain food prices have kept inflation from going even higher, as the CPI outside of food is up 3.2% since July 2017.

On the flip side, tariffs seemed to start to hit major household appliances (up 3.5% in July, 8.5% for the last 12 months), but haven't hit new cars and trucks much (+0.3% in July, +0.2% for the year). It's hard to tell if the increase in building materials are having much effect yet, since housing costs were steadily rising before the tariffs, but it's worth keeping an eye on as things move through the supply chain.

Something that's not keeping up with the rate of inflation is wages, and that was shown again today in the Real Earnings report.
Real average hourly earnings for all employees were unchanged from June to July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from a 0.3-percent increase in average hourly earnings combined with a 0.2-percent increase in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings decreased 0.2 percent over the month due to no change in real average hourly earnings combined with a 0.3-percent decrease in the average workweek....

From July 2017 to July 2018, real average hourly earnings decreased 0.4 percent, seasonally adjusted. Combining the change in real average hourly earnings with a 0.3-percent increase in the average workweek resulted in a 0.1-percent decrease in real average weekly earnings over this period.
Same story we've seen for pretty much all of 2018, inflation rising, and nominal wages are not, which means workers fall behind.

Which continues the paradox that we're in of "low unemployment, low wage growth, and rising inflation." At least one of these has to change soon, and the story of the 2nd half of 2018 and 2019 will be which one does change.

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