Producer Price Index ("PPI")

In the United States, the Producer Price Index measures the average change over time in the prices domestic producers receive for their output. Whereas “retail” constitutes prices reflected through the sale of goods and services to the public for their own consumption - not for resale - the Producer Price Index measures the cost of goods and services at the wholesale level. Each month, the Producer Price Index is published by the Bureau of Labor Statistics. Typically, the Producer Price Index is released by the Bureau of Labor Statistics the second full week of each month.

The Producer Price Index traces its origin back to the late 1800’s…and its origin emanated as a result of an interest the United States government had at that time in understanding how tariffs placed on goods imported into the United States were affecting prices.?

On March 3, 1891 the United States Senate passed a resolution which authorized the Senate Committee on Finance to study the effect tariffs were having on imports (and on exports as well) in relation to the production of goods and services on the domestic front. This resolution passed by the Senate in 1891 led to the creation of the Wholesale Price Index. Up until 1978, the now-Producer Price Index was known as the Wholesale Price Index.??

This past week, the Bureau of Labor Statistics released their Producer Price Index report. The Bureau's most recent report showed that the Producer Price Index increased by .3% during the month of November. The .3% Producer Price Index increase in November constituted a 7.4% year-over-year increase in wholesale prices. The annual increase in the Producer Price Index in October had been 8.1%...slightly higher than the annual increase registered in November (7.4%).

When Americans talk about inflation, most would be referring to the inflation they face at the consumer level. Which would be, prices Americans are paying everyday when they go shopping. And while the Producer Price Index does not specifically measure inflation at the retail level - i.e.: at the consumer level - the Producer Price Index serves as a very effective overall inflation indicator. This is so because as the cost of goods and services increase for businesses at the wholesale level, those increases in costs that businesses incur at the wholesale level are then often passed on to consumers at the retail level. Leading to the more widely talked about, consumer inflation.

As supply chains become more expensive - as supply chains often do become more expensive when there are increases in wholesale prices - companies can compensate for the cost increases they face - and for potential short-term revenue losses - by passing price increases on to consumers at the retail level. This leads to consumer inflation.

As the Producer Price Index rose in November - rising this past month once again, albeit at a relatively slower pace - further increases in wholesale costs incurred by companies could in turn lead to further increases in consumer inflation. Rises in consumer prices are reflected in the Consumer Price Index (“CPI”). The Consumer Price Index, moreso than the Producer Price Index, is more often referred to by consumers, when discussing inflation.

During Presidential and Congressional campaigns, we sometimes witness politicians speaking to a proclaimed interest in creating more American jobs through a reduction in the outsourcing of production - and of manufacturing - to countries which have lower wages, and lower production costs. Within the same geopolitical discussions, tariffs are sometimes discussed as well.?Outsourcing, and tariffs...each of which correlate to prices companies pay at the wholesale level and prices consumers pay at the retail level. Wholesale prices, which directly correlate to the Producer Price Index.

In 2018, President Trump placed a 30% tariff on imported washing machines and a 50% tariff on imported solar panels. Also in 2018, President Trump placed a 25% tariff on imported steel, and a 10% tariff on imported aluminum.

President Trump’s agenda had largely been predicated on an “America first” approach...an approach which ultimately involved some techniques which, some may argue, could have affected prices both consumers and companies would end up paying, as a result of tariffs. There once was a somewhat similar “America first” pro-tariff doctrine which was adhered to by another former United States President 119 years earlier. And it was this pro-tariff doctrine which led to the creation of what is today the Producer Price Index.

In 1891 - 1891 being the year the now-Producer Price Index went into effect -? the United States Congress was in a progressive, reactive, protectionist mode. The mood of Congress at that time had been triggered by the then-President’s comparable interest in putting “America First” as well, so to speak, through the imposition of tariffs on imported products. Similar in some ways, to President Trump’s tariff objectives, 119 years later.

One year prior to the establishment of the now-Producer Price Index, the McKinley Tariff Act was passed. This would have been the year 1890…as the Wholesale Price Index went into effect one year later, in 1891.

The intention of the McKinley Tariff Act had been to protect American industries from foreign competition. The procedure for which was to be the placement of tariffs on imported goods. Across the board, the McKinley Tariff Act levied tariffs of 49.5% on imports.

The McKinley Tariff Act was enacted by the 25th President of the United States, William McKinley. Prior to being elected President of the United States, William McKinley was known as the leading Republican expert in Congress when it came to the subject of tariffs.?

Throughout his 14 years in the United States House of Representatives, William McKinley was a staunch believer in tariffs, as was the majority of Republicans at that time (William McKinley was a Republican). Serving in the House of Representatives, pre-Presidency, William McKinley was responsible for framing several tariff bills. In the House of Representatives, William McKinley served as the Chairman of the House Ways and Means Committee.?

While it can potentially be argued that a reduction in tariffs could lead to lower wholesale prices - leading to a lower Producer Price Index - President McKinley, and President Trump for that matter, each using different reasoning, utilized tariffs while not necessarily subscribing to an acceptance in a cause-and-effect scenario where potential increases in prices brought on by tariffs would be felt by consumers at the retail level.?

In November 2020 - the month and the year of the last Presidential election - the Producer Price Index came in at .85%. One year later, in November 2021, the Producer Price Index rose substantially to 9.88% (in November 2022 the Producer Price Index was 7.4%).

In relation to prices, and thus to inflation, tariffs are excluded from any computation, as per the Producer Price Index. So the tariff itself is not included within the Producer Price Index. This is because tariffs are a tax. And taxes are not included in the Producer Price Index. Tariffs are collected by companies, then passed on to the U.S. Customs and Border Protection Agency, by companies.?

While tariffs are not directly included in the Producer Price Index, it can be argued that tariffs indirectly lead to increases in prices paid by consumers at the retail level. Yet the imposition of tariffs by President Trump illustrated that while there is likely a correlation between tariffs and higher prices - i.e.: in higher wholesale prices, as can be measured by the Producer Price Index - there is, in looking at the Producer Price Index during President Trump's term in office, not necessarily a definitive, discernible causation.

The Producer Price Index consistently stayed at 3% - or lower - during Trump’s Presidency. In fact, between April 2020 and August 2020, the Producer Price Index was actually negative. The lowest computation for the Producer Price Index during President Trump’s term in office was in April 2020, when the Producer Price Index came in at -1.52%.?

American producers may trigger an increase in prices consumers ultimately pay at the retail level when the producers themselves incur price increases for imported goods, at the wholesale level. The increase in prices incurred by companies at the wholesale level - potentially as a result of the imposition of tariffs - would then be reflected in the Producer Price Index - i.e.: higher wholesale prices. Notwithstanding other geopolitical factors which could affect wholesale prices, and retail prices as well. Such as supply, demand, interest rates, politics, the unemployment rate, and so on and so on and so on...?

The balancing act found in any wholesale or retail cost increase conversation, or in any tariff discussion for that matter, is in how an increase in prices could affect demand. Since as prices increase, demand may in turn decrease. Yet companies reducing prices at the retail level in order to increase demand - if demand had indeed diminished - can be made all the more difficult in an era of higher-than-planned-for rising wholesale prices, as would be reflected in a relatively high, or in an increasing, or in a stubbornly consistent higher-than-planned-for Producer Price Index.