The producer-price index (PPI) for final demand, which measures changes in the prices businesses receive for their goods and services, rose a seasonally adjusted 0.5% from February, as we can see from the above FRED graph. According to Wall Street Journal, it rose 0.6% excluding the volatile categories of food and energy.
Since PPI indicates an overall rise in the prices business receive from buyers such as governments, consumers and other businesses for a wide array of goods services, we would expect an increase in inputs leading a rise in price for the final consumption goods. The U.S. has experienced a prolonged period of sluggish price increases, with inflation undershooting the Fed’s 2% target for 22 consecutive months. The CPI was up 1.1% in February from a year ago and rose 1.6% excluding the volatile categories of food and energy. The PCE index was up 0.9% in February from a year earlier and rose 1.1% excluding food and energy.
In my understandings, I believe that businesses would open their eyes to cheap inputs from foreign markets so as to guarantee their profit margin. The demand for imported inputs will increase resulting in rise of prices in imported goods, according to ECON 101 demand and supply model. The latest report from Labor Department said that prices for imported goods increased 0.6% in March from a month earlier, on top of February’s 0.9% increase. Import prices last month were still down 0.6% from a year ago.
China would be a big market for cheap imports again, as I once wrote in my early post. The policy of devaluating Chinese Yuan not only slows down China’s GDP growth but also makes Chinese goods cheaper to be imported for other countries. This policy has effectively increased foreign demand for Chinese goods and services and stimulated exports to a new higher level. Given that the domestic inputs prices increase. the US would shift to foreign markets, where China is a demanding one.
However, inflation would pose a lot of risks to economic performance therefore the policy makers are now trying to control it. Looking back to CPI, if businesses have already found ways to reduce their costs of inputs, the inflation may not be serious as we thought. The good news is that Overall prices for goods were flat in March. Food prices rose a seasonally adjusted 1.1% from February while energy prices sank 1.2%. Therefore we still cannot tell whether the increase in inputs of businesses will eventually lead to an increase in inflation.