Finance
Inflation: Not Just Food And Energy
We've been pounding the table on the inflation picture for quite some time and the PPI data released this morning confirms - its not just about so called 'commodity' inflation anymore. The headline figure for April was +0.2% (SA) increase from March but the 'core' ex-food ex-energy was reported at +0.4%. This is for the category deemed 'finished' goods. Further down the chain, 'intermediate' goods (ex-food/energy) was +1.2% and 'crude' goods (again, ex-food/energy) were +7.9% ! Lets look at this data in a bit more detail, on a year on year basis so as to avoid the dreaded seasonal adjustments.Finished Goods: From April 2007, finished goods ex-food/energy rose 3.0%. However, consumer goods ex-f/e rose 3.6% and consumer non-durables ex-f/e rose a hefty 4.5%. Adding food and energy to the mix brings the annual change in finished consumer goods to an astounding 7.7%. Is it any wonder why the consumer feels pinched more and more every day?
Intermediate Goods: Year on year, ex-foods and energy, the middle state of production saw an increase of 5.8%.
Crude Goods: Here we see the largest increases. Crude energy materials rose 51.9% in the past year. Shocked? Well, ex-f/e, crude goods rose 24.6!.
The notion that there is no pricing power seems to have been invalidated in the past year. Clearly, firms have been able to raise prices through out the production chain. The bigger question is why this is not more accurately reflected in CPI. There are only three explanations: (1) Productivity rose faster than the price of inputs hence firms were able to hold the line on final pricing, (2) Firms were unable or unwilling to pass on price increases to the final consumer and instead saw margins reduced or (3) CPI is just wrong. Probably a combination of the last two choices; we tend to put the most weight on CPI being wrong.
