Commentary Directory

PPI's Quiet Rise and the Energy Elephant in the Room

Jacob Hess
October 11, 2023

Moderate gains continue for the Producer Price Index (PPI), with a September increase of 0.5% MoM. This marks the third straight month of increases in the 0.5-1.0% range. The annual increase of PPI was 2.2% YoY, just slightly higher than the 2.0% YoY. These gains in the headline index are heavily impacted by the rebound in energy goods producer prices, which grew 3.3% MoM in September, following a large 10.5% MoM jump in August. Core PPI increased at a more modest rate of 0.2% MoM. The annual increase remained sticky, just below 3% at 2.8% YoY, very similar to where it has been for the last five months. Let's look at the breakdown of the goods and services subcomponents.

From BLS

The PPI for goods increased 0.9% MoM and 0.8% YoY. Just like the headline PPI index, this was heavily impacted by energy, with the 3.3% MoM rise in energy PPI accounting for 75% of the rise in goods PPI in September. More specifically, 40% of the rise in goods PPI was attributed to a 5.4% MoM rise in producers’ gas prices. Core goods PPI, excluding food and energy, was up only 0.1% MoM but had a more robust annual gain of 2.0% YoY. The annual gain was driven by a 3.3% YoY increase in finished consumer goods PPI and a 3.6% YoY increase in private capital equipment PPI, although both are moderating on a monthly basis. Moving up the supply chain, there continues to be near-term upward pressure input costs from commodity prices. Unprocessed goods PPI jumped 4.0% MoM after two months of 2% or higher monthly gains in August and July. While the pressure here is almost entirely being applied by energy (7.5% MoM) and food (3.5% MoM), it is something worth watching.

Now we turn to the services sector. Services PPI increased at a moderate pace of 0.3% MoM in September and was up 2.9% YoY. The annual pace picked up considerably, around 0.7 percentage points from the previous reading of 2.2% YoY. That acceleration came on the back of a large upward revision to July’s monthly rate from 0.5% MoM in the August report to 0.8% MoM in September’s report. Another major reason for the acceleration in PPI growth was a 13.9% MoM increase in deposit services, which are now up a whopping 32.3% YoY. This large increase can likely be attributed to rising interest rates increasing the costs banks have to pay on deposits as a result of the Fed’s hiking. All together, the consumer services PPI (less trade, transport, and warehousing) grew 0.4% MoM and is up 4.0% YoY, which is actually a slight deceleration from the 4.1% YoY reported in August.

To really get to the core of the issue, we can look at a “Super Core” version of PPI which excludes energy, food, and trade services. This index increased just 0.2% MoM in September and was up 2.8% YoY, slowing from 3.0% YoY in August. Thus, in the end, we see that through the noise, producers are seeing a general trend of disinflation. This would be all fine and dandy, but the volatility in energy can’t be ignored. With new supply risks in the outlook from conflict in Israel and Gaza, which could lead to sanctions against Iranian oil, and from OPEC+ countries looking to maintain production cuts, high energy prices could be here to stay. With little volatility to the downside, this becomes an inflationary pressure that all producers have to pay attention to since energy input costs are almost universal. Suddenly, the picture becomes a lot less rosy.