Producer Price Index and Inflation Outlook

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the latest producer price index and an outlook for inflation.

• After two straight months of measurable declines in producer prices, companies were paying more to buy stuff in May. Producer prices advanced 0.5 percent in May and are now up 1.8 percent from one year ago.
• The prices at the very early stage of production (of crude goods rather than of finished goods) were rising at a much faster rate of 7.7 percent from one year ago, though this measure tends to be a bit volatile due to the swings in energy prices.
• The latest rise is not anything for consumers to be alarmed about. First, producers do not always pass on all of the costs to the consumer. Second, there are many items in consumer prices that are primarily a service rather than a good, such as a visit to a barber or dentist, which are rarely impacted by rising producer prices.
• Consumer price inflation, therefore, for all of 2013 should be about 2 percent. The next cost-of-living-adjustment to social security checks will therefore match this increase.
• However, expect higher consumer price inflation in a few years. The massive monetary stimulus of the recent past years will steadily trickle into the prices. Consumer price inflation of 4 to 5 percent is a distinct possibility by 2015. With higher inflation, expect measurably higher mortgage rates.
• America is fortunate to have one extraordinary privilege that no other country has. The U.S. dollar is for all intents and purposes the global reserve currency, which thereby permits no automatic inflation due to printing a lot of money. Iranian citizens, for example, prefer holding on to the dollar (via the black market) rather than keeping Iranian currency. If somehow in future years we see the rise of the Chinese economy and people’s belief that Chinese currency will strengthen over time, then some of the U.S. dollar luster may fade.  The printing of money will then no longer provide a free lunch and could lead to  greater inflationary pressure. Just to illustrate an extreme opposite end of this, where there is no trust in a country’s currency, Venezuela for example has a 35 percent inflation rate today from printing too much money.