What does the chart show?

The chart shows producer price inflation (PPI) for the US, China and Eurozone since 1995. PPI measures inflationary pressures at an earlier stage in the production process. Changes in commodity prices will directly affect this number. The key question today is whether these rises in costs will end up being passed on through the production process and result in higher retail prices paid by the consumer. As shown, PPIs have been soaring globally to their highest levels in decades. In the US, PPI rose to 8.6% year-on-year in September, with larger increases in China (+13.5%) at a 26-year high, and the Euro Area (+16.0%), the highest on record.

Why is this important?

For almost all of 2020, PPI in these regions was in negative territory as the pandemic-induced lockdowns suppressed consumer demand. More recently, price pressures have been building as a sharp recovery in demand from consumers has coincided with supply chain disruptions, commodity price increases and shortages of labour that have pushed up costs for businesses. Some of these rises in producer prices are inevitably finding their way into consumer prices: CPI in the US rose by 6.2% over the 12 months to October, and as with PPI, a key driver of the sharp rise was the energy component, up 25% over the past year, during which the crude oil price was up by 125% to October end. There is no doubt that the rise in inflation is proving to be steeper and more persistent than expected, testing the resolve of central banks to stick to their ‘transitory’ view of inflation.