Aug 2019 - Deflation on one hand, rising inflation on the other

Two inflation reports this week seemed to make Wall Street happy by indicating overall prices weren’t going up by much. But the underlying details didn’t seem to cheery to me, and certainly aren’t for a lot of Americans who are either paying too much for some things, and not getting anything for other things.

Let’s start with Producer Prices, which had a tepid top line increase.

The Producer Price Index for final demand rose 0.1 percent in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved up 0.2 percent in July and 0.1 percent in June.

The markets seemed to like this, as it showed overall inflation on the producer side to be small enough to warrant further rate cuts, but it was still growing, which means businesses were still getting incoming revenue.

But dig further down into the report, and you’ll see that the increase was only on one side of the economy, while goods prices continued to fall.

On an unadjusted basis, the final demand index rose 1.8 percent for the 12 months ended in August. In August, the advance in final demand prices is attributable to a 0.3-percent increase in the index for final demand services. In contrast, prices for final demand goods fell 0.5 percent.

That goods number seems like a problem. And it gets worse when you go further up the supply chain.

Processed goods for intermediate demand: The index for processed goods for intermediate demand decreased 0.7 percent in August after rising 0.2 percent in July. Sixty percent of the decline can be attributed to prices for processed energy goods, which dropped 2.2 percent. The index for processed materials less foods and energy fell 0.4 percent. Conversely, prices for processed foods and feeds increased 0.3 percent. For the 12 months ended in August, the index for processed goods for intermediate demand declined 2.8 percent, the largest decrease since dropping 3.0 percent for the 12 months ended August 2016....

Unprocessed goods for intermediate demand: The index for unprocessed goods for intermediate demand fell 1.0 percent in August following a 1.6-percent advance in July. Over 80 percent of the decrease can be attributed to prices for unprocessed energy materials, which moved down 2.2 percent. The index for unprocessed foodstuffs and feedstuffs fell 0.5 percent. Conversely, prices for unprocessed nonfood materials less energy edged up 0.1 percent. For the 12 months ended in August, the index for unprocessed goods for intermediate demand decreased 7.8 percent.

Further numbers show that while there were producer price increases in “finished” foods over the last year, that’s all at the processing stage. Producers of crude (direct source) foods have seen their prices drop by 1.4% in the same time period, and plummeted by 6.7% in August

Other big drops in intermediate stages include a lot of manufacturing-based businesses.

12-month price change goods for intermediate demand
Processed
Plywood -14.9%
Natural gas -14.8%
Gasoline -12.9%
Softwood lumber -11.7%
Hardwood lumber -9.2%
Steel mill products -10.6%

Unprocessed
Wastepaper -41.8%
Natural gas -33.3%
Wheat -21.5%
Aluminum base scrap -20.3%
Iron and steel scrap -18.9%
Crude petroleum -15.3%

Seems like it would be very hard to get by when producers are getting less money for their products, but the cost of making the products and paying for services (through labor and other means) seem to keep going up. Which might explain why manufacturing is heading toward recession and farm bankruptcies continue to grow in the country (with Wisconsin leading the way).

And now we are starting to see this deflation/inflation split bleed over to the consumer side, as evidenced by Thursday’s Consumer Price Index report.

The numbers: Cheaper gasoline kept consumer U.S. inflation in check in August, but rising costs for staples such as health care and housing pointed to a buildup in price pressures that could complicate the Federal Reserve’s job to manage the economy.

The consumer price index rose 0.1% last month, the government said Thursday, matching the MarketWatch forecast….

Yet if gas prices are set aside, inflation appears to have accelerated since the start of summer. Another closely watched measure of inflation that strips out food and energy rose 0.3% for the third month in a row.

The yearly increase in the so-called core rate advanced to 2.4%, matching a 13-month high. The last time the core rate of inflation was higher was in 2008.

Going deeper into that CPI report,take a look at what happened with prices for ”food at home” (i.e., bought at the grocery/farmer’s market).

…The index for food at home declined for the third month in a row, falling 0.2 percent. The index for meats, poultry, fish, and eggs decreased 0.7 percent in August as the index for eggs fell 2.6 percent. The index for fruits and vegetables, which rose in July, fell 0.5 percent in August; the index for fresh fruits declined 1.4 percent, but the index for fresh vegetables rose 0.4 percent. The index for cereals and bakery products fell 0.3 percent in August after rising 0.3 percent in July.

Those lower food and gas prices may be a nice thing if you’re not in those industries. But you’re paying a lot more for some other items these days, including your home and your over-the-counter drugs.

The index for all items less food and energy increased 0.3 percent in August, the same increase as in June and July. The medical care index was the largest contributor to the August increase, rising 0.7 percent. The index for hospital services rose sharply in August, increasing 1.4 percent, and the index for nonprescription drugs increased 1.6 percent. However, the index for physicians’ services was unchanged, and the index for prescription drugs declined slightly, falling 0.2 percent.

The shelter index rose 0.2 percent in August, following 0.3 percent increases in June and July. The indexes for rent and for owners’ equivalent rent both advanced 0.2 percent in August. The index for used cars and trucks rose 1.1 percent in August, its third consecutive increase. The recreation index rose 0.5 percent in August, its largest increase since December 2018. The index for airline fares continued to rise in August, increasing 1.7 percent following a 2.3-percent advance in July. The index for personal - 4 - care rose 0.3 percent in August after increasing 0.4 percent in July. Also increasing in August were the indexes for apparel, for motor vehicle insurance, and for tobacco….

The index for all items less food and energy rose 2.4 percent over the past 12 months, with most major component indexes rising over the span. The shelter index increased 3.4 percent over the last year, and the medical care index rose 3.5 percent.

Actually, I see 4.3% for all “medical care services” since August 2018, with a startling 18.6% jump for “health insurance”. That, along with the rising cost of housing, are both increasing past the 3.2% increase in average hourly wages.

With those rising core prices, unemployment at 3.7% and unemployment claims not rising yet, why are observers claiming that this week’s inflation reports won’t deter the Federal Reserve from lowering interest rates next week? In fact, another rate cut would mean negative real rates vs core inflation, which would be a recipe for these already sizable core inflation to go even higher.

And the reason why the Fed will likely cut illustrates a lot – other parts of the economy are stalled out and in a deflationary trap of lower prices that should lead to increased layoffs in those (mostly blue-collar and agricultural) industries.

Given that over 2/3 of our economy is based on consumer spending, when do these increasingly squeezed people stop putting up with the rising prices in other sectors of the economy? I think the Fed (and a lot of GOP politicians) are fearful that it happens sooner than later.