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Consumers have been hit hard in the wallet by inflation this year, with CPI up 5.4% year-on-year in September. But consumer prices are only part of the inflation equation. Producers of goods and services also face rising prices in an inflationary environment. Producer price increases have been even more dramatic than the rise in CPI, and we’re starting to see those higher prices trickle down to consumers. This is yet another indication that inflation is far from “transitory.”
The Producer Price Index in September was 0.5% month-on-month in September. Final-demand goods prices were up 1.3% on the heels of a 1% gain in August. Year on year, the PPI was 8.6% in September.
The CPI has lagged the PPI so far this year. Many producers dragged their feet when it comes to passing on their higher costs to their customers. They initially bought into the transitory inflation narrative and thought if they could just hold out, their costs would come back down. But it’s becoming increasingly clear that these price increases are forever. As the transitory inflation narrative continues to unwind, more companies are passing on these higher costs to their customers. This will likely continue an inflationary spiral.
Over the last couple of months, we’ve seen some companies raise prices to offset their costs. FedEx announced big rate hikes last month. Earlier this summer, Chipotle raised menu prices, and companies such as Procter & Gamble, Coca-Cola, Kimberly-Clark, General Mills, Unilever all raised prices as well.
The trend of companies passing costs on to consumers appears to be accelerating.
According to a Reuters report, large US manufacturing companies including General Motors, General Electric, 3M and Boeing are struggling with higher costs “but agreed the hit to profits can be mitigated by charging higher prices for their goods.”
On Wednesday, Harley-Davidson announced it will increase surcharge pricing in the US to offset higher pricing. The company said it is also exploring raising surcharge costs globally.
In its most recent earnings report, McDonald’s said it has increased prices to keep pace with surging costs.
Meanwhile, 3M cut its full-year earnings outlook and said it will raise prices. 3M produces a wide range of construction and building products. Its price hikes will likely ripple through the construction market.
Of course, once companies raise prices, they rarely drop them.
Companies that hold off on raising prices to offset their costs risk crushing their earnings. That would not bode well for a stock market that continues to ignore rising prices and surge to new records.
Mainstream analysts blame supply chain bottlenecks for the continued rise in producer prices. As Reuters reported, “Companies across the globe sounded the alarm on supply issues months ago that have pushed prices higher on raw materials from chemicals to steel.”
This certainly contributes to the problem, but the mainstream continues to ignore the bigger driver of inflation – the Federal Reserve. It continues to create inflation at breakneck speed. Despite taper talk, the Fed continues the “emergency” monetary policy it initiated at the beginning of the pandemic. Virtually every week, the Fed balance sheet expands to a new record level, as the central bank pumps billions into the economy.
Whether caused by supply chain problems, Fed policy, or some combination of the two, the continued rise in producer prices undercuts the “transitory” inflation narrative. The bottom line is more money coming out of your wallet for the things you buy every day.
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