The U.S. Department of Labor reported last week that its Producer Price Index (PPI) rose by 0.3% in August (a 3.6% annual rate), higher than the economists’ consensus expectation of a 0.2% increase. Service costs rose 0.5% in August, and some commodities have risen spectacularly in price since March. Lumber and silver have more than doubled in the last six months, while copper and gold have each risen over 40%.
The day after the PPI report came out, the Labor Department reported that the Consumer Price Index (CPI) rose 0.4% in August (a near-5% annual rate), higher than the consensus expectation of a 0.3% increase. The “core” CPI, excluding food and energy price increases, also rose 0.4%, so we have some hint of brewing inflation, but nothing serious yet. We’ll likely see more serious inflation next year.
Despite these increases, the overall Bloomberg Commodity Index, which is heavily weighted in energy commodities, is down about 12%, through September 10. One main reason why wholesale prices remain fairly flat – and commodity indexes are declining – is that crude oil prices tend to dominate the price indexes and energy prices have been falling. Crude oil prices fell below $40 per barrel last week and crude oil demand could drop further in the fall and winter months due to less driving and other travel.
Inflation is visible now in some key commodities but the Consumer Price Index (CPI) has not yet risen, due to a reticence among many consumers to shop during the COVID lockdown. As a result, there is a vast pool of savings among the middle class and rich, which will likely be spent more freely in 2021, when COVID concerns will be lower – either when the bug diminishes, or an effective vaccine is widespread.