December 8, 2023

Hi, everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this episode of Trends Talk. Today I wanted to discuss inflation. I wanted to discuss where we’ve been, where we are today, and where we’re going here in the future as it relates to inflation. Now, I wanted to discuss two indexes, two metrics as it relates to inflation because there’s a very big difference in terms of what each of these inflation metrics is looking at and what it means as we move forward. And so the two data series that I wanted to discuss here today is the US Consumer Price Index and then the US Producer Price Index. Now, there’s again, a difference from a definition standpoint, but also in terms of the reality of what our clients will be feeling as a result of some of the nuances between the Consumer Price Index and the Producer Price Index.

So before I get into forecast and some of these major differences, what I wanted to first do was define these series. Us economists, we love our definitions, and so I wanted to make sure it was clear exactly what we’re talking about in terms of the differences in what these two metrics are looking at. So the US Consumer Price Index, that’s also referred to as the CPI. And really what that’s doing is it’s measuring a weighted average of prices of a basket of consumer goods, that often includes services and transportation, food and medical care. So it’s really representative of the prices that us consumers are dealing with here today. The Producer Price Index, on the other hand, it’s also referred to as the PPI, and it’s a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.

So you can see based on these two definitions that there is a consumer facing element to the Consumer Price Index, hence the name, but the Producer Price Index most often correlates with the data that we’re working with with our clients and often reflects pricing changes in dynamics that our clients are dealing with on a day-to-day basis. One of the big major differences between these two indices is the fact that we expect the Producer Price Index to go negative in 2024 on a quarter-over-quarter growth rate. And actually as we look at the month-over-month growth rate or the 1/12, it’s already negative here today. The Consumer Price Index, on the other hand, will slow in its pace of growth, but not cross below that zero line as we look at our forecast for 2024.

Now, that’s a really important distinction between the two because that Producer Price Index turning negative means challenges on the pricing front as we look forward, especially for those producers of goods and services here in the US in 2024. And this has been something that I’ve been talking with our clients a lot about recently. If we think back to 2021 and 2022, both these metrics, the Consumer and Producer Price Index we’re accelerating in their pace of growth. So I can call out a few numbers just to give you a perspective here. If you look at that month-over-month growth rate or the 1/12 rate of change, the Consumer Price Index was accelerating and peaked at 9.1% as we looked at the middle of 2022. That peak was actually right in June of 2022. And since then, we’ve seen the CPI slow down to where we’re sitting today on a 1/12 rate of change basis again at about 3.2%.

So yes, inflation for consumers is slowing, and that’s welcome news for a lot of the consumers out there after this extremely high inflation environment that we’ve been dealing with. And even though we expect further slowing as we look out to 2024, especially based on our mild recession outlook, we don’t expect the Consumer Price Index to turn negative. So we’re slowing down, and we would expect inflation to continue to slow down as we move into 2024. And it’s one of the reasons economists are talking a lot about when interest rates will come down in 2024. It’s because we’re continuing to see that pace of growth for consumer inflation slowing down.

But like I mentioned, when we work with our clients, we focus so much more on the PPI as it relates to their internal pricing strategy, and that’s as a result that of, again, correlation but also the application of that data set. Again, the Producer Price Index is really measuring average selling prices as it relates to products and services that are being developed here in the United States. It’s a different story when you look at that PPI. So if we look back to ’21 and ’22, again, a time where the CPI was accelerating, the PPI was also accelerating, except the PPI reached a much higher 1/12 rate of change peak at about 18.3% in June of 2022.

So for all of our clients out there, for most of the businesses here in the US, we were raising prices in ’21 and ’22, and there was support for that based on what the movement in the PPI. And then as we sit here today, we have seen that PPI 1/12 rate of change retreat to even below zero. So if you look at the October 2023 data, again, on a month-over-month or 1/12 rate of change, as we sit here today, we’re at minus 0.4%. So what does that mean? That means for those businesses out there, if you’ve been hearing challenges as it relates to passing through a price increase and it not being well received, or if there’s clients, individuals, customers that are asking for even price decreases, we’re starting to see that data show up in the PPI.

So for those sales and strategy teams moving forward, we expect on a quarter-over-quarter basis or 3/12 rate of change that this PPI will remain in the negative territory as we look at the next four to five quarters. So that means it’s going to be very challenging to pass through price increases as we sit here today, and certainly as we progress in 2024. Now, that’s temporary. And a lot of that decline that we’re seeing is due to the inventory challenges, the excess inventory challenges, a lot of the input costs and commodities being below the year ago level. And that’s what’s stimulating this challenging pricing conversation. And that will continue to be the case as we move through 2024.

So it’ll be important to focus on competitive advantages as it relates to talking about price, but I think it’s really important that we acknowledge that as it relates to price increases in 2024, passing one through is going to be very challenging given these negative expectations for the PPI. In 2025, the PPI starts to accelerate once again, and it’ll likely be a time where we’re increasing prices once again.

But in 2024, some of the margin benefit might have to shift to coming on the cost savings side rather than the price increase side as a result of this PPI going negative. So it’s important to build into your strategy for 2024 challenging conversations as it relates to price. Arm the sales team with this information so that they’re prepared should they receive any pushback and have a plan for those that would be pushing back should you try to hold prices or even increase prices. It’ll be a challenging time next year to do that. I hope you found this information helpful. My name’s Taylor St. Germain with ITR Economics. Thank you for joining me on this edition of Trends Talk, and we’ll see you on the next one.