This morning’s PPI number came in hot, at a 1.1% month-over-month increase. More alarming than that may be the rise in prices sans food and energy of 0.2%.
This matters because it shows a large portion of commodity prices, notably energy, are the key driver of price inflation for producers.
When have we seen this before? In 2008, prior to massive job cuts, according to Societe Generale:
With consumer budgets unable to absorb higher prices, businesses have a very difficult time passing on their own cost increases. As a result, everyone ends up getting squeezed. For producers of discretionary goods and services, this can lead to a double whammy of rising costs and falling revenues. This is precisely the scenario that played out in early 2008. With oil prices approaching $150 per barrel, businesses found themselves unable to pass-through their cost increases. The solution was to offset the margin squeeze by shrinking the workforce and squeezing more output out of fewer workers. This proved to be a strong recessionary impulse that exacerbated the underlying weaknesses in the US economy.
As prices, energy included, continue to increase for producers, they may be forced to take steps similar to those made in 2008. And while Soc Gen don’t see this as an immediate risk to the recovery, it could grow into one.