The Importance of the Producer Price Index

On November 6th of 2020, I wrote an Opinion Article about the effect of the outrageous stimulus packages, designed to counter the negative economic effects of the pandemic, that highlighted American fiscal policy during 2020. At the time, the non-seasonally adjusted year to date increase in the Monetary Supply was about 40%. The Producer Price Index showed little change in actual inflation, but it was made clear that I thought it was likely that, with this unchecked growth in the monetary supply, considerably high inflation was likely.

The situation is worse today. According to Federal Reserve data, since January 2020, the monetary supply has increased from 3,982.3 Billion (For the sake of simplicity: M1, Unadjusted.) to 6,757.9 Billion—a 59% increase. Worse, the United States Bureau of Labor Statistics reported Wednesday that the Producer Price Index, which measures inflation in the cost of the sale of goods, was up 1.3% for the month of January. While this may not seem as though it is important, this is a sign that, as money is being sent directly to Americans, volatility is rising in the Friedmannian equation MV=PQ, indicating that there is more inflation to come. But, even if inflation were to stay at 1.3 percent for the rest of the year, the compounded result would be a total inflation rate, at least in the sale of goods and services, of approximately 14.5 percent—the highest since 1946. To put that into perspective: If you had 100 dollars at beginning of the year, it would be worth only what 85.46 dollars, adjusted for inflation, by the end of the year. Of course, this is not a prediction. There are many uncontrollable, unforeseeable factors that effect this estimate, including the price of oil, potential inflation in other currencies, change in the buying habits of consumers, etc.

Nevertheless, it is still vitally important, if only for the value of the United States Dollar, that no further stimulus packages are passed by the Biden administration. Putting aside simple capitalistic concerns, (Such as sending out checks to civilians when the unemployment rate was 6.5% last month.) it is necessary to remember the equation MV=PQ, Money Supply X Volatility=Price X Quantity. Essentially, when Monetary Supply increases, but volatility decreases, as we clearly witnessed during the better half of 2020, as long as they do so relatively proportionally, there will be no or little inflation. This is why, in order to stave off inflation—theft of the value of our currency by the government--volatility must stay low. But, with President Biden’s Stimulus Package already moving forward, ( it is likely that we will see an increase in consumer spending, as civilians will have more money to spend on the goods they desire. But, with an increase in spending, inherently comes an increase in volatility. Basically, in this situation, when people spend more of their money it becomes clearer that there is more money in the market than there should be, causing prices to rise. The increase in Producer Price Index was the first sign that the Stimulus Packages are causing inflation to rise—woe betide America if Volatility increases further.

Information was sourced from The Balance, The Wall Street Journal, CBS News, and the United States Bureau of Labor Statistics.