Producer prices spike 7.8% annually, highest amount on record

If inflation seems bad now, just wait. A new economic indicator may mean that inflation is about to get even worse.

The Producer Price Index (PPI) saw its highest annual jump since record-keeping began in July, with the cost of producing goods for consumers rising 7.8% when calculated annually.

The PPI measures costs from the seller side of the equation, and higher producer costs are almost always passed on to consumers down the line. A record-high PPI may mean record-high inflation is just around the bend.

The jump was mostly due to final demand costs, which includes processing of goods and final assembly before sale. Supply chain disruptions and difficulty hiring people to do this work of processing and assembly may be causing the increases.

Higher than expectations

The Labor Department had been expecting the annual increase to be around 7.3%, the same as it had been in June.

Month over month, the PPI rose 1%, which matched June’s increase but was nearly double the .6% forecast. If the PPI continues to rise at this rate, the annual increase could reach 10-11% by the end of 2021.

Some of the areas that saw huge gains were an 11.2% increase in cars and car parts, as well as increases in airline passenger services and hospital outpatient care. Tobacco saw a modest increase of 2.7%, while beef and veal prices fell 11.6%.

The Federal Reserve has continued to say that the higher prices are a temporary effect of the pandemic and will work themselves out as it recedes.

Fed sending mixed messages

Most recently, however, the Fed has said that it could increase interest rates in coming years beginning in 2023, which only happens when inflation is a concern.

The lingering supply chain issues due to difficult hiring as pandemic unemployment boosts persist should improve soon, however, as the boost is scheduled to end for all Americans in September.

Some states have already ended the boost or will end it this month, and not coincidentally, jobless claims have been falling more in recent weeks as people finally need to go back to work instead of sitting at home getting paid to do nothing.

Whether easier hiring will help the PPI slow down remains to be seen, but the impact of giving people generous unemployment when employers desperately need workers has become clear.

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