Producer Prices Climb While Politicians Double Down

Inflation concerns escalated Tuesday morning as the Producer Price Index for January came in well above economist predictions, according to the Bureau of Labor Statistics…(BLS)

• M-O-M: The Producer Price Index for final demand jumped 1.0% month-over-month, up from the 0.4% increase in December.

• Y-O-Y: The Producer Price Index for final demand was up 9.7% year-over-year, down slightly from the 9.8% reported in December.

NOTE: Economists had projected monthly growth would only be up 0.5% and that annualized growth would fall to 9.1%

This data comes on the heels of the recent CPI report that showed that overall inflation had hit 7.5% in January. Mahir Rasheed, U.S. economist at Oxford Economics, told The Wall Street Journal that PPI is unlikely to dissipate with continued supply chain problems and high energy prices… (Wall Street Journal)

• “The latest advance in producer prices was driven by another strong gain in goods prices, but increases in services prices continued to broaden…The combination of stubborn supply disruptions and elevated energy prices will prevent producer prices from reverting to more normal patterns until later this year.”

Making matters worse is the complete ignorance about basic economics among our policymakers. Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Basically too many dollars chasing too few products. Since policymakers can not control supply, they can only control demand. This is what raising interest rates does, it discourages people from borrowing money and it encourages others to save money. Both have the same result, lowering consumption. This is why they say “high prices are the cure to high prices.” As people slow their consumption supply and demand move closer to equilibrium and prices fall.

The last thing our policymakers should be doing right now is encouraging consumption and yet that is precisely the debate happening…(Washington Post)

• “The White House and top Democratic lawmakers are beginning to weigh a new push for a federal gas tax holiday, potentially pausing fees at the pump as part of a broader campaign to combat rising prices…Asked about the proposal, the White House signaled that ‘all options are on the table,’”

This is the exact opposite of what policymakers should be doing right now. I understand this is more about politics than economics. Democrats have two horrible likely options right now. Option one, the Fed is cautious about raising rates which means prices keep rising and voters go to the polls paying record amounts for everything. Option two, the Fed raises rates too quickly and it causes a retraction of the economy which means voters go to the polls during a recession. These are not ideal for Democrats because as James Carville once said “It’s the economy, stupid.” They are hoping for option three which is a belief that eventually, supply chains will work out their problems and consumers will shift more spending towards services easing demand for goods. The problem? The Fed has been waiting for this to happen for the last six months and look at us now…