Producer Price Index: Persistent Inflation Despite Falling Gas Prices

Businesses in the U.S. raised prices on services and most goods in August, the latest sign that inflationary pressures persist.

The producer price index fell 0.1 percent in August from July, the second monthly decline, but that mostly reflected plunging gasoline prices rather than a wider reversal of the skyhigh price increases the index has been registering since last spring. It is also a slower rate of decline in prices than the 0.4 percent decline in Juy.

Excluding energy prices, the index rose 0.34 percent for the month. That represents a slight slowdown from the 0.38 gain in July and 0.35 in June.

The PPI is up 8.7 percent since August of last year. That is down from 9.8 percent a month earlier and the second monthly decline. Excluding energy, producer prices are up 7.6 percent from a year ago, the fifth consecutive month of slowing year-over-year gains.

The producer price index measures prices paid to U.S. businesses for goods and services. Over time it tends to follow the same trends as the Consumer Price Index, although the composition of the two indexes can lead them to depart from time to time. In the pandemic and post-pandemic era, a gap opened between the two index but it has since narrowed as PPI’s year-over-year gains have moderated.

Core PPI—which excludes food, energy, and the margins of retails and wholesalers—rose 0.2 percent for the month, an acceleration from the 0.1 percent increase in July.

A PPI gauge known as “all commodities” is up 15.3 percent compared with a year ago. This has fallen for two consecutive months. Analysts look to this index for historical comparisons because it goes back to 1913 while the main PPI index—known as “final demand” because it tracks sales of finished products and services to their end users—was launched less than a decade ago.

The PPI index of services for final demand rose 0.4 percent, double the figure recorded in July. Although this is only one month’s data point, the Consumer Price Index also recorded a month-to-month increase in services prices. This raises the potential that some of the inflationary pressure that had been driving up the prices of goods has moved into services. Economists warn, however, that the PPI index can be volatile and the services side of it especially so.

The index for final demand goods fell 1.2 percent in August after declining 1.7 percent in July. Both declines are largely attributable to falling gas prices. The index for final demand goods less energy rose 0.1 percent. Core PPI goods, which excludes food and energy, rose 0.2 percent.

There was some relief when it comes to food inflation. The gauge of food was nearly flat for the month after rising 1.3 percent from June to July.  The measure of foods sold to consumers fell 0.3 percent for the month. The metric of food products such as fresh fruits and vegetables that are used in an unprocessed state by the consumer plunged 7.7 percent, which largely reflected a 25.2 percent decline in the price of eggs. The index of processed foods—such as bread, milk, candy and nuts, and carbonated drinks—rose 0.6 percent. Compared with a year ago, food prices are up 13.1 percent.

The producer price index also tracks so-called goods for intermediate demand, those sold from one business to another for further processing before being sold to their final customers. Prices of processed intermediate goods are up 14.1 percent over the past 12 months. They fell 1.7 percent in August, which followed a 2.3 percent decline in July. Prices of unprocessed intermediate goods—which include things like fresh fruit that will be canned and unrefined energy sources like coal and natural gas—are up by 36.1 percent year-0ver-year and 5.7 percent compared with a month ago, in large part due to a huge increase in natural gas prices.

Although it is sometimes supposed that a falling producer price index will lead to lower consumer prices, economic data suggests that while the two indexes tend to move together over time, one does not necessarily push the other.