THE BASIS POINT

Inflation Measures Can No Longer Exclude Energy

During the past two days, March producer inflation (PPI) came in way above expectations at 1.1%, showing pricing pressure for manufacturing sectors, and March consumer inflation (CPI) came in right at the expected .3% mark. Excluding volatile food and energy costs, both numbers were in line with expectations. However, when food and energy sustain sharp increases for long-term periods, it doesn’t make sense to “exclude” them from analysis as most reports do.

High producer inflation and flat consumer inflation can mean that businesses won’t pass cost increases onto the consumer. And with more dismal housing data today — housing starts and building permits for March were at their lowest level in 17 years — it’s possible that the consumer wouldn’t be able to handle consumer goods price increases anyway. So businesses are under inflation pressure and they can’t pass costs along to consumers because consumers are too strained because of a weak housing and job market (remember, the economy has lost jobs for the past 4 months), which ultimately leads to slow or negative GDP growth. With two consecutive quarters of negative GDP growth, the economy is in a recession. But with producer inflation.

Today’s Fed Beige Book survey of economic conditions between March 5 and April 7 underscored the need to count energy in inflationary analysis by saying that, for producers, “price increases were consistently reported for food products, fuel and energy products, and many raw materials–more specifically, increases in the price of chemicals, metals, plastics and other petroleum-based products were commonly cited.”