Who Absorbs Price Jumps in Raw Materials?

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A Fred, St. Louis Fed, article explores producer price increases at the various intermediate stages.

The Fred Blog asks Who Absorbs the Price Jumps in Raw Materials?

The PPI measures how much producers charge for their products, while the CPI measures how much households pay for those products.

The PPI data above are organized in four distinct stages along the production process, from raw materials to final product. What’s striking in the graph is that we can clearly see fluctuations in the cost of raw materials for stages 1, 2, and 3 but not for stage 4. Stage 4 is quite steady. According to the Bureau of Labor Statistics, industries assigned to stage 4 primarily produce output that is consumed as “final demand,” which may have obstacles the other three stages don’t have. For whatever reason, the producers at this stage absorb the price fluctuations of inputs—which is something in economics we call “limited pass-through.” A similar mechanism occurs when fluctuations in exchange rates or import tariffs affect foreign goods: Not all input price changes are reflected in retail price changes for those goods.

Some goods and services consumed by “final demand” businesses at stage 4 are motor vehicle parts, commercial electric power, plastic construction products, biological products, beef and veal, engineering services, machinery and equipment wholesaling, long distance motor carrying, and legal services.

The BLS describes the first three stages as follows: Industries assigned to stage 3 primarily produce output consumed by stage 4 industries; industries assigned to stage 2 primarily produce output consumed by stage 3 industries; and industries assigned to stage 1 produce output primarily consumed by stage 2 industries.

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I wanted to see the relationship between PPI stages and CPI but the scales were so strikingly different that the resultant graph looked nonsensical.

Mike "Mish" Shedlock

Comments (21)
No. 1-5
abend237-04
abend237-04

The graph makes sense to me. The major buyer's price discovery systems today are essentially real-time, and their leverage on the seller is the same, making for stickier final product pricing.

Individual buyers in the product supply chain, of which there may be many, however, have far less leverage and fewer real time pushback options. Dickering with a supplier over a piece part too much can put a line down and send a thousand people home. A buyer's rejection of a seller's price increase for 1,000 widgets is more likely to send the seller agent home if things aren't worked out quickly.

Stuki
Stuki

Who absorbed, emphasis -ed, as opposed to -s, would be a much less fundamentally misguided headline.

As is always the case in social “sciences”, there is simply no justification for supposing any empirical observation carries any relevance at all, for any other time, place and circumstance than the one specifically studied.

Webej
Webej

Prices of stuff sold retail is much harder to gauge. Stuff that doesn't sell for list price (trends have a huge effect on marketability) goes to second tier stores, then is sold in bulk to outfits that find other outlets, discount stores, etc. A pair of slacks might start out at 140 and drop to 14 2½ years later. This is impossible to gauge, and the whole retail complex earns (or loses) vastly different margins on various items. So the complex of middlemen (the links in the global supply chain can go to hundreds in retail) absorbs a large part of the price swings but this is impossible to track in the aggregate. Don't forget that many items list at 10× or even 20× the price of manufacture -- if they didn't, they could not absorb losses and other costs involved in the whole chain: the price of actually making something has less and less to do with actual costs. We are a long way from ordering a pair of shoes at the village cobbler whose costs are the shop, the leather, and the time.

Casual_Observer
Casual_Observer

The real problem is still wages to the masses are flat relative to prices of all things . It turns out more labor availability leads to slow wages for all and stagnant lives for all except the upper crust.

abend237-04
abend237-04

Both the direct and indirect labor content of these categories has been sliding as a percent of total product cost for decades now. There was simply no other way to move five hundred million Chinese peasant workers into the global manufacturing workforce without this happening. Even Krugman has recently discovered this, and it's knock-on effect, imho, of electing a populist, isolationist president due to governments utter bungling of massive, ongoing retraining domestically.