Wholesale Inflation Heats Up Due To Jump In Car, Food Costs, New Calculation Method

Janet Yellen will be pleased, or maybe not. Producer Price Inflation printed hotter than expected across all its various incarnations (good news, no deflation; bad news, no deflation excuse for The Fed). Ex Food-and-Energy prices rose 1.8% YoY (4-month highs), considerably more than the 1.5% expectations and surged 0.4% MoM - the most in 16 months. PPI Final Demand rose 1.5% YoY (1.3% exp).

The rise in PPI appears driven by Food prices which are up 1.0% (the most since April), car prices (up 1.0%) and pharmaceuticals, but mostly thanks to a new calculation change because as the BLS reports, "In October, a 26.1-percent jump in margins for fuels and lubricants retailing accounted for nearly 40 percent of the increase in the index for final demand services."  In other words, of the 0.5% jump in PPI services, 40% was due to a new calculation for in margins for fuels and lubricants retailing.

Away from calculation-fudged services, the story was much different: prices for final demand goods moved down 0.4 percent, the worst monthly tumble in over a year.

So on one hand running hot.

 

Except for actual goods, which were dragged down by a whopping 3.0% plunge in energy prices, mostly thanks to gasoline.

The breakdown:

Some more details on what caused the move:

  • Final demand services: The index for final demand services moved up 0.5 percent in October, the largest increase since a 0.5-percent rise in July 2013. The October advance can be traced to a 1.5-percent increase in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing inched up 0.1 percent. Conversely, the index for final demand transportation and warehousing services edged down 0.1 percent.
  • Product detail: In October, a 26.1-percent jump in margins for fuels and lubricants retailing accounted for nearly 40 percent of the increase in the index for final demand services. The indexes for machinery, equipment, parts, and supplies wholesaling; food and alcohol retailing; food and alcohol wholesaling; inpatient care; and traveler accommodation services also moved higher. In contrast, prices for airline passenger services declined 0.7 percent. The indexes for loan services (partial) and for chemicals and allied products wholesaling also decreased
  • Final demand goods: The index for final demand goods moved down 0.4 percent in October, the fourth consecutive decrease. The October decline was led by prices for final demand energy, which fell 3.0 percent. The index for final demand goods less foods and energy edged down 0.1 percent. Conversely, prices for final demand foods moved up 1.0 percent.
  • Product detail: Over 80 percent of the October decline in prices for final demand goods can be attributed to the index for gasoline, which dropped 5.8 percent. Prices for liquefied petroleum gas, prepared animal feeds, home heating oil, diesel fuel, and ethanol also moved lower. In contrast, the index for meats increased 5.3 percent. Prices for electric power, pharmaceutical preparations, and passenger cars also advanced.
  • The index for finished consumer foods rose 1.4 percent, and prices for finished goods less foods and energy edged up 0.1 percent.

And then there was the good old hedonic adjusment. As SMRA explains:

Each November the BLS includes a report on the average dollar value of quality changes for the new model year for passenger cars and light trucks. The estimate is calculated primarily from information supplied for the October PPI data.

 

Quality changes can include a variety of improvements such as safety features (for example, brakes, airbags or tire pressure monitors), audio systems, warranty changes, and changes in the level of standard of optional equipment.

 

These changes can be voluntary or mandated by law, but in either case add something to the average cost of a motor vehicle that is reflected in the PPI components.

 

There is no predictable pattern to how much quality changes will add to the value of motor vehicles in a model year, nor do passenger cars and light trucks have the same amount or types quality improvements each year. Due to their increased popularity and use as a passenger vehicle, light trucks, minivans, crossovers, and SUVs have generally seen more quality improvements. Upgrades tend to be related to safety, emissions, and comfort as what were once perceived as utility vehicles now serve as family cars. Since 1996, the average amount of quality improvement for passenger cars is about $120, with light trucks at about $201.

 

Producer prices for passenger cars have been rising more slowly than those for the light trucks category. This is an artefact of the move to motor vehicles other than passenger cars as household transportation. The popularity of SUVs, crossovers, and more traditional light trucks and minivans is reflected in firmer prices and, as noted above, enhancements to make them more like passenger cars.

 

However, the quality adjustment is only one factor affecting the prices for cars and trucks. Even a substantial increase in the quality adjustment may be more than offset by heavy discounting and big incentives imposed to help sales.

The best news: prices of alcoholic beverages dropped both from September (-0.4%), and a year ago (-0.3%).