The Econonaut

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What does "producer price index" mean? Adam Davidson, NPR's economics reporter explains.


And now, are you having trouble treading water in the sea of economic news?

(Soundbite of economic news)

Unidentified Man #1: The GDP report.

Unidentified Man #2: Global Goods.

Unidentified Man #3: Irrational exuberance.

Unidentified Man #4: Oil is totally fungible.

Unidentified Man #5: Bear market.

Unidentified Man #6: (Unintelligible) Indicator.

Unidentified Woman: Naked short selling.

Unidentified Man #7: Market capitalization.

Unidentified Man #8: Hedge fund manager.

Unidentified Man #9: Dow Jones, S&P 500.

CONAN: Well, here is a life jacket courtesy of our Econonaut, NPR's industrial - international economics correspondent, Adam Davidson. And there's a new bunch of scary economic news inking up the papers this morning. Fannie and Freddie took another beating, the Commerce Department reported home building at a 17-year low, and wholesale inflation has skyrocketed. Adam Davidson is here to explain what the heck those numbers actually mean. And Adam, nice to have you back.

ADAM DAVIDSON: Great to be here, Neal.

CONAN: Adam joins us from our bureau in New York. Today, we're going to discuss inflation, particularly wholesale inflation numbers. Of course, we want your questions. We especially want to hear from manufacturers and producers struggling with rising costs today. How do you walk the line between absorbing those costs and passing them along to your customers and consumers? Tell us if you've noticed price increases that caused you to do a double take. Not gas today, please. We know, we know. Our phone number is 800-989-8255. Email us, You can also weigh in on our blog at And Adam, first of all what the heck is wholesale inflation?

DAVIDSON: It's known as the producer price inflation, and it's basically what manufacturers - what things cost for manufacturers. So, if you make food, it's how much the grain costs you, or how much the milk costs you, or how much the more processed foods cost you that you put into your cupcake or whatever it is you're making. If you make keys, it's how much the metal costs you and how much the machines that make the keys cost you.

It's a - you know, and most of the time the average person who doesn't happen to run a factory doesn't really need to care about the producer price index or what factor is paying for their inputs, for their goods. But in a time like this, it really matters a lot, because it shouldn't be too hard to figure out that if manufacturers are forced to pay a lot more for products - for their costs, then we're going to pretty soon have to pay a lot more for the things we buy. And in July - we now learn today that in July, American manufacturers paid a lot, a lot more than they did just one month earlier for the stuff they need to make the goods we buy.

CONAN: And let's get this straight. We're talking about the PPI, the producer price index. When we typically talk about inflation, that's the CPI, the consumer price index.

DAVIDSON: Exactly. So, what is inflation? I mean, inflation, broadly speaking, is when prices go up and a currency is worth less. For the Federal Reserve, they look at a very specific number as their core determinant of inflation. That's the core CPI, that's the - a basket of goods that the average consumer buys. They take out oil and food from that, which a lot of people find very frustrating but they feel that those prices are so volatile. But the producer price index - I mean, you can see it as sort of a leading indicator. If we know what the producer price index is today and how it's moving, whether it's going up or slowing down, that gives us a hint of what you and I will be paying at the store a month or two or six months from now.

CONAN: Yes, we just caught another term of economic jargon there, Adam, leading indicator. Is it a leading indicator because it's in advance of other things? Or is it a leading indicator because it's big and important?

DAVIDSON: I'm glad you called me out on that. I mean, in a way, it's a trailing indicator, which is another economic term.

(Soundbite of laughter)

CONAN: Thanks so much.

DAVIDSON: Yes. Because it comes - I mean, we are looking at July data, in other words, today the Bureau of Labor Statistics of the U.S. government releases this number and they base it on what happened a month ago. But that number, you know, what people paid a month ago, was in part determined by things happening and March and April and May, you know, when oil prices were really, really high.

So, it's a trailing indicator in the sense that we're learning something today about what happened a few months ago. But it's a leading indicator. It's telling us what's going to happen in the future because producers are upstream. There are manufacturers who are earlier in the process than we enter the process. Obviously, when you buy something in the store, it was made before you bought it. So, that's - so in that sense, what the producers are paying today or a month ago tells us what you and I might be paying a month from now.

CONAN: And you mentioned that today, the numbers for June went way, way up. How high is up and what does that mean?

DAVIDSON: Now, it's 1.2 percent. It doesn't sound that terrifying, right?


DAVIDSON: I mean, 1.2 percent is a small number. That's for one month. That's from June to July. And to give you a sense, that's the highest it has gone up in 27 years. If you do the math, that's 1981. That was the time of really huge inflation. You know, we're talking, you know, very right in the heart of that malaise period.

CONAN: The misery index, as President Reagan would put it.

DAVIDSON: Exactly. And if you do the year-on-year, you know, you annualize it as people like to do the number, is considerably higher where, oh shoot - I just had it in front of me. I think it's 11.9 percent, something like that. I don't have it directly in front of me. But it's a - let's say 11 percent, something like that. It means that producers are paying a lot more this year. I mean, you want that number to be in the two to three percent for the annual, for a full year range - two to three percent. This is many multiples of that.

CONAN: Yeah, approaching 10 to 12 and around there.

DAVIDSON: Right. And very few of us get a 10-to-12 percent raise every year. So, that gives you a sense of how big these prices are. If this spread to the whole economy, we'd all need a 10-to-12 percent raise just to tread even, just to buy the same goods we bought last year.

CONAN: And we can hear our president upstairs gulping with that news. So, the struggle here is for producers to not pass along prices if they don't have to, because obviously, they want to continue to sell their products. But if their costs are going up, as you say, eventually, they're going to have to pass it along to their consumers.

DAVIDSON: Right. I mean, either their profit margin shrinks or they actually go into the red. They lose money or they pass those prices on to consumers. Now, producers generally - so when you have something really volatile, you know, it moves around a lot, like oil. You see oil prices zooming up to 140 something, then zooming down to 113 or whatever they were or just now. You see food prices, similarly, if you're a food manufacturer - and food manufacturing is a huge - it's something like half of the manufacturing done in America.

You know, rice goes up, so your Rice Krispies cost more to make. Corn goes up. Your Corn Flakes cost more to make, and so do your baked goods and so - you know, on and on and on. But if it's just a month spike and month spike back, they're not going to pass that on, because they want to keep you as a customer, and they don't want every time you go to the store to be wondering are you going to pay 3.99 for their Corn Flakes or 17.23. So, they'll absorb the price.

But over time, if it sustains for a long period of time, they have no choice or they go out of business. And even if they do absorb the price, it's not like that's just a free gift they give to us. I mean, they're going to have to get that cost somewhere else, which means laying people off. That means, not paying for advertising, which might mean that the media suffer. You know, that spreads through the economy...

CONAN: Somebody is going to get bad news. Anyway, 800-989-8255. Are you a manufacturer who's having to deal with this spike in the cost of your materials? And also, we'd like consumers to tell us what they've noticed spike price increases in. Again, not gasoline, please. We know all about that. We have Jim on the line, 800-989-8255. Email Jim is with us from Spencer in Iowa.

JIM (Caller): Hi.


JIM: Yeah, we're a micro roaster of coffee, and we would normally get a catalog every six months. Now, we're getting a catalog every two months.

CONAN: A catalog is a price list.

JIM: A catalog, it represents all new prices for most items. We did the slight decrease in our loose teas. But back in March, you know, we experienced about a 20-percent increase overall and now, we've had another increase in just the last four weeks and... CONAN: And is that another 20-percent hike?

JIM: No. Unfortunately, it has increased, but it's not as high as 20. We've gone up again on 10 to 15 percent, depending on where the beans are coming from.

CONAN: And - but nevertheless, a 30-to-35-percent price increases over the past four or five months, that's quite a bit.

JIM: That's steep.

CONAN: And are you trying to absorb those to keep your customers?

JIM: I can't possibly absorb those.

CONAN: So, how much is the price of a pound of your coffee gone up?

JIM: There's a couple of them like the Sumatra that's gone up about 35 percent.

CONAN: And have sales dropped as a result?

JIM: Not that I can tell. But I do believe that, you know, people are tightening their budgets. They're buying canned coffee more than fresh roast, but you know, they come in for those special occasions, weekends, birthdays.

CONAN: And are you nervous about the next - arrival of the next price list, the next catalog?

JIM: Yup.

CONAN: Yup. How many people work for you, Jim?

JIM: It's a little family business. There's three of us in there.

CONAN: Nevertheless, it keeps your family afloat?

JIM: It certainly helps us pay our mortgage, yeah.

CONAN: Jim, good luck to you. Appreciate the phone call. Passing on costs, a constant nightmare for manufacturers. We've got Al Lubrano on the line. He is the president of Technical Materials Incorporated, which is a metal and electroplating business. Nice to have you on the program with us today.

Mr. ALFONSO LUBRANO (President, Technical Materials Incorporated): Good to be here.

CONAN: And the cost of your materials has gone up how much?

Mr. LUBRANO: Oh, I couldn't estimate an exact number. But it would be anywhere from, let's say, three to five percent to, in some things, 15, 20 percent. One of the things that's unique about us is that we're in the metals business. So, a few months ago - we've seen huge run ups on gold, silver, precious metals, nickel, copper in the last few years. Things have just skyrocketed.

CONAN: And you used these materials in manufacturing and electroplating.

Mr. LUBRANO: Yes, absolutely.

CONAN: And so, have you raised your prices?

Mr. LUBRANO: Well, it's very difficult to raise prices. Now, as I explained to someone the other day, there is a two-tier system here, because metal prices, precious metal prices, things like that, there are adders in our pricing and our customers are very used to seeing those prices fluctuate. So, (unintelligible), that gets passed on.

CONAN: They know if it involves gold and the price of gold shot up, they expect that there's going to be a pricing.

Mr. LUBRANO: Right, or copper or nickel or any of those...

CONAN: Yeah. That's like getting lobster and it says market price.

Mr. LUBRANO: Absolutely, absolutely. But there are other things that are much more difficult. For example, cost of labor going up or for example, supplies like wooden pallets, cardboard boxes, obviously energy. Everybody is suffering with that. And in the markets we serve - we play in global markets - it is very difficult to pass those costs along.

CONAN: Because of the competition?

Mr. LUBRANO: Absolutely. And don't forget that in the global marketplaces, if you get competitors in countries like China who are manipulating currency, they can produce the same product you can, you are in an extreme disadvantaged.

CONAN: I see, because of their currency manipulation, they can keep prices down low where as you're having difficulty. How many people work for you?

Mr. LUBRANO: About 225.

CONAN: And obviously this is pretty important to all of them. If these kind of prices increases continue, what are going to have to do?

Mr. LUBRANO: Well, we're going to have to continue to do the same thing we've been doing. We are a Lean Sigma company, and every year we target our operations and attempt to take a significant portion of cost out.

CONAN: What does Lean Sigma mean?

Mr. LUBRANO: Well, Lean Sigma is basically using SixSigma techniques to look at your processes, and you constantly are working to continuously improve them, make them more efficient, get better yields, find better ways to manufacturer. If you are not doing things like that today, you're not going to survive.

CONAN: You worried about and have being forced to make layoffs?

Mr. LUBRANO: No, not so much layoffs. We've taken a different approach. We've continue to grow our business over the years, and what we have done instead of laying people off, we haven't hired. So, we cross train our people, we move our people around, and we focus on productivity. So, basically, we've added very few people for large increases in sale for over the last five years.

CONAN: And that tells me that if the prices weren't so high, there might be, say, 50 people out in the world who don't even know they are - who would have jobs with you, who don't because you haven't...

Mr. LUBRANO: I don't think manufacturers look at it that way today. I think what we look at is constantly improving process as yields and finding ways to do things better. And we have added some employees, but 15 years ago, the increase in sales that we had might have caused us to add 50 people and that increased caused us to add eight to 10.

CONAN: Al Lubrano, good luck to you.

Mr. LUBRANO: Thanks a lot.

CONAN: Al Lubrano of Technical Materials Incorporated is the president. They're joining us from his office in Rhode Island. You're listening to Talk of the Nation from NPR News. And let see if we can get another caller on the line, to talk about the producer price index, the PPI. Terry is with us from Flatwoods in Kentucky.

TERRY (Caller): Hello.

CONAN: Hi, Terry.

TERRY: I just want to put my two cents' worth in on the topic. I'm a mom-and-pop shop for auto-parts retail. I would like to run the store by myself. I usually have at least five or six kids and another adult and constantly changing prices and being competitive with the advances in Auto Zones and Pep Boys is next impossible. So, I've - short of moving a cot in, I just live here. Changed the prices, do the sales, sweep the floor.

CONAN: You're living in the store?

TERRY: Well, almost, short of showering and shaving and feeding dogs.

CONAN: That's not a cost-saving task I contemplate, but maybe we'll set up cots here in Studio 3A.

TERRY: Well, when it gets down to this level, if you want to stay in business, you've got to do something. And that's the only alternative I have at the moment.

CONAN: OK. Terry, good luck to you.

TERRY: Thank you.

CONAN: Appreciate it. And Adam, we just have a minute left, but if the kind of things that we're hearing about continue, obviously there's a point at which it's not sustainable.

DAVIDSON: Yeah. I mean, you look at someone like Terry and that's his solution, but that means he's not going to the movie. He's not going out to dinner. The rest of the economy hurts because of that. And so all of these choices, whether it's passing prices along and spiking inflation or whether its cutting back and decreasing spending, the end result is going to be the same, which is a drastically slowing economy.

The big challenge here is that in the past, the U.S. was able to determine many of these prices, because if our demand slacked off, we wouldn't buy stuff, and the prices would go down. But now, with the rest of the world growing so fast, especially, of course, China and India, we don't have as much influence as we used to. And that's what makes this period a little scarier and more confusing in the past periods.

CONAN: Adam Davidson, we'll try to confuse you less again next week. Adam Davidson, thanks very much for being with us today.

DAVIDSON: Thank you, Neal.

CONAN: If you'd like to suggest a topic for the Econonaut, send us an email, and next week, we'll put the exuberant in irrationality. If you want to ask the Econonaut a question, again, go to Global Economy Tomorrow, the Political Junkie joins us at the Newseum. This is Talk of the Nation from NPR News. I'm Neal Conan in Washington.

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Inflation A Growing Threat As Producer Prices Jump

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An index tracking prices that companies pay for goods jumped up sharply in July, which means inflation is a growing threat. Meanwhile, the housing market continues to slump, with home-builders sharply cutting back on construction projects.

The Labor Department's producer price index saw its biggest jump in 27 years, with prices jumping 1.2 percent in July. The so-called "core rate" excluding food and energy was 0.7. That's much higher than most economists expected. And it means that high oil prices and rising costs for commodities like steel, copper and other raw materials are finally resulting in higher prices for things like machinery, bicycles and coffee-makers — the stuff that companies and consumers buy.

That puts the Federal Reserve in a bit of a bind. It had been cutting interest rates to try to stimulate the struggling economy. But it can't keep doing that if it's worried about inflation, since those rate cuts can make inflation snowball.

Also out this morning, new data show the number of new homes that builders broke ground on in July was down 11 percent from June and down 30 percent from a year ago. The ongoing wave of foreclosures is continuing to glut the market and push down prices.



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