Latest Producer Price Index Data Does Not Bode Well for Future Prices
U.S. Producer Price Index (PPI) data for October 2024 does not bode well for future prices in the service sector, especially those related to the U.S. restaurant economy.
The PPI measures the average change in producer prices for goods and services produced over a given month. In essence, it measures inflation at the wholesale level. It is calculated by the U.S. Bureau of Labor Statistics and published every month.
The PPI measures price changes by producers and is said to predict prices at the retail level or future movements in the Consumer Price Index or CPI. To put this into context, let’s look at the agriculture industry. The price for fertilizer and diesel fuel as they are being produced are examples of products manufactured at the wholesale level. When they are sold to a farmer, those prices are the price of fertilizer and diesel fuel at the retail level and are higher than the producer level, representing the profit of the producers and the cost of distribution. If fertilizer plants and gas refineries raise their prices, the retail establishments that sell them to farmers will attempt to do the same thing to maintain profits, thus driving up consumer prices for food and the CPI. Increases one month in the price of corn on a commodities market will result in higher prices for consumers in the future for corn in their supermarkets and restaurants.
The following are highlights from the latest PPI report, which was released Nov. 14:
• The October PPI increased 2.4% year over year, and from 1.9% in September to 1.7% in August, an alarming trend showing wholesale inflation is rising.
• The food index increased 0.2% in October after rising 0.4% increase in September 2024. Food away from home and food at full-service establishments increased by 0.2% in October as well.
• The PPI has increased 10 months in a row, and wholesale food prices were up substantially in October (.7%).
If a rising PPI in October results in a higher CPI, this could mean bad news for a Federal Reserve interest rate cut on Dec. 18. A lack of a rate cut would be bad news for American consumers and the hospitality industry, especially if increasing food prices continue at the wholesale level and credit card interest rates remain high.
From an economic perspective, the increasing trend in the PPI from August through September is not good news for the U.S. economy, which is growing (2.37%) but not at the strength of our post-World War II average (3.2%).
About the Author
Dr. Timothy G. Nash, director of the McNair Center for Free Enterprise and Entrepreneurship at Northwood University, is the lead author of a new study that explores the impact of minimum wage in Ohio.