Interpret That!

How would you interpret a sharp decline in the producer price index?

WASHINGTON (Reuters) – U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate increase.

Other data on Thursday showed an increase in the number of Americans filing for unemployment benefits last week. The trend in weekly jobless claims, however, remained consistent with a tightening labor market.

The Labor Department said on Thursday its producer price index for final demand slipped 0.1 percent last month, weighed down by decreasing costs for services and energy products.

That was the largest decline since August 2016 and reversed June’s 0.1 percent gain. In the 12 months through July the PPI increased 1.9 percent after rising 2.0 percent in the year through June. Economists had forecast the PPI ticking up 0.1 percent last month and climbing 2.2 percent from a year ago.

Barring the possibility that it’s just a fluke, it seems to me that it suggests deflation. It also makes me wonder if China’s economic problems aren’t worse than the Chinese authorities might want us to believe.

3 comments… add one
  • TastyBits

    These economic theories were never correct, but prior to the 2008 financial collapse, there was no empirical way to refute them.

    Newtonian physics was superseded by Einsteinian physics, but you do not need the Theory of General or Special Relativity to build a bridge. As long as you are travelling substantially less than the speed of light, Newtonian Mechanics works just fine.

    Economic theories have been superseded, but it will take some time for this to be accepted. The classical and modern economic theories do not account for the effects of credit creation.

    In a credit backed, government guaranteed, fractional reserve financial system, small amount inflation can be substantially leveraged to create additional credit to supply debt to create money. It results in a financialized economy where financial wealth is used to create more financial wealth, and the debt created is used to expand the economy.

    Within a strict regulatory framework which includes a separation between commercial and investment financial institutes, the growth of financial wealth is constrained, and this in turn, constrains the wealthy from creating financial wealth. This is why our good, little capitalists abhor these constraints, but it is why our good, little progressives abhor the constraints, also.

    Decreasing goods & service prices and increasing asset prices are positive. Increased asset values allow additional credit to be created, and lowered consumption and production costs allow additional products to be purchased. In a properly regulated financial system, the majority of the debt can be used for asset purchases, and the constrained credit creation will lower the risk of bubbles.

    With financial wealth constrained, other non-financial methods of wealth creation are required.

    On the other hand, the economists could be correct, and we are experiencing a mass illusion. Now, did I take the red pill or the blue one?

  • Ben Wolf

    I explain the drop as success of trade deals and blame-the-worker mantras in making people so insecure they can no longer effectively bargain for waged, serious problems with the government’s measures of unemployment and the U.S. experiencing a continuous demand drain from the rest of the world.

    Also note Japan’s headline unemployment rate (measured like ours) is 2.8% and their wages and inflation aren’t budging either.

  • serious problems with the government’s measures of unemployment

    The BLS’s direct measurements of employment/unemployment are known to be quite flawed. An enormous part of the so-called jobs created are created out of thin air from various fudge factors, e.g. the birth/death ratio.

    Handling of part-time employment in the survey indices is problematic, too. Holding three part-time jobs at minimum wage isn’t the same as holding one at above minimum wage but those three part-time jobs add into the establishment survey.

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