Different Inflation Strokes for Different Folks
Inflation does not run smoothly through the economy. Don’t think of it like a tap running to a basin, with the price level rising smoothly. Instead, think of it like a tide pushing up against a rough shoreline where some of the crannies get submerged long before others.
And you might be surprised by who is getting soaked by the resurgent inflation we’ve seen over the last three months.
The government said that the producer price index for final demand, which tracks prices received by American businesses, rose 1.1 percent for a second consecutive month in May. Compared with a year ago, prices are up 6.5 percent, the worst since the bad old days of Bidenflation in 2022.
Let’s start with the consumer side. The index tracking sales for goods and services for personal consumption advanced 1.1 percent for the month, an acceleration from April’s 0.8 percent increase. For the year, the personal consumption index is up 5.9 percent. Inside this group, goods prices were up 3.5 percent for the month and 11 percent for the year. But once you subtract energy, the monthly increase falls to 0.3 percent—which was a slowdown from April’s 0.4 percent—and the annual increase falls to 2.9 percent.
The services side for personal consumption saw prices rise 0.4 percent for the month and 4.5 percent for the year, which looks very hot. But a meaningful part of that increase came from “portfolio management,” one of the stranger categories in the PPI report. This is calculated by multiplying the basis points fund managers charge by the value of the assets they manage. That means when financial asset prices rise, the “price” of portfolio management rises even if the fee is unchanged as a share of assets. In other words, when stock and bond values rise, the portfolio-management price level can rise with them. This is not ordinary household inflation. If you exclude it, by our back-of-the-envelope calculation, personal-consumption services prices rose roughly 0.25 percent in May and 3.8 percent year-over-year.
Not coincidentally, that is close to the CPI services picture: services rose 3.5 percent over the year, while services less energy services rose 0.3 percent for the month and 3.4 percent for the year.
Government’s Inflation Bill Is Even Higher
The government sector took a much bigger hit from inflation. The prices of all the goods and services that governments—federal, state, and local—purchased from U.S. producers in May rose by two percent. That followed a 2.1 percent rise in April and a two percent rise in March. Compared with a year ago, they are up 10.6 percent.
The prices paid by government for services from the private sector rose 0.5 percent in May following a one percent increase in April and a much milder 0.3 percent increase in March. For the year, they are up 5.9 percent.
Goods prices soared 4.0 percent in May following a 3.8 percent increase in April and a 4.6 percent increase in March. Compared with a year ago, the prices for goods purchased by the government are up 1.79 percent. Quite clearly, a big part of this government-facing inflation is coming from energy. Prices paid for energy supplied to the government rose 11.6 percent in May, and they are up 57.6 percent for the year. If you exclude energy and food, the government’s goods inflation falls to one percent for the month and 5.6 percent for the year.
That’s still higher than the personal consumption side or the inflation picked up by the consumer price index. Consumers paid 0.8 percent more for goods in May compared with April, according to the CPI. Excluding food and energy, consumer prices for goods actually fell in May and were up just 1.1 percent for the year.
The war with Iran has not just sent the prices of energy soaring. Prices of defense purchases by the government are up sharply. They rose 2.6 percent in May, 3.4 percent in April, and 3.2 percent in March. Compared with a year ago, they are up 14.7 percent.
Consumers may feel the tides of inflation washing over our ankles again. The government sector, however, is neck deep in it.
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