Core Pricing Pressure on the Rise

Pricing pressures are hot, primarily at the producer level. And, after months of below-target inflation readings, mainstream measures of inflation are rising as well, compared to the deflationary lows of the pandemic. Though Federal Reserve Chairman Powell has said that the central bank is willing to let inflation rise above its 2% target in exchange for a continued decline in unemployment, we don't think it will be too long before the Fed starts to pull back some of its support for the economy. We track 19 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 7.5% rate, below last month's reading, which was 7.7%, as some producer price gauges are cooling a bit. But drilling down to core inflation, our reading is 3.2%, with the all-important five-year target rate at 2.3%. The big increases in recent months have indeed come at the producer level, as the PPI for intermediate unprocessed goods, for example, is now 46% and the PPI for intermediate processed goods is 24%. Much of this price activity is driven by the recent recovery in commodity prices, including oil, which has more than tripled year-over year. The Federal Reserve's inflation forecasts now call for a core inflation reading of 4.2% in 2021 and 2.2% in 2022.