Up, and here’s why:

Prices are up primarily because inflation is officially out of control.

Inflation is as bad as it’s been in over twenty years. Consider the PPI report. They report inflation in stages of production, it’s much like a pipeline. Prices at the one end are pushing through to the other.

Source: US Department of Labor BLS PPI Report

High crude good prices put pressure on manufacturers to pass along higher prices through to the intermediate state, this in turn pushes higher prices to end users. Finally, higher prices at retail feed into the prices the average citizen experiences in the CPI report.

Businesses are throwing in the towel. Many companies are raising prices as has occurred any time in the last 20 years, and more companies are planning to raise prices now. This chart is from the NFIB survey and it shows what percent (net percent) of firms are raising or planning to raise prices.

In total 41% of companies are planning on raising their prices (see chart below for the net percent planning to raise prices).

Source: National Federation of Independent Business (NFIB)

NFIB also asks companies what is the number one largest problem facing them. The number one issue right now is inflation. It’s the first time inflation has been enemy number one in decades.

Not only have these prices been pushing through the pipeline, but the consumer’s getting wise to the direction prices are going.

A year ago the consumer was faced crude prices were threatening a 15% increase, but intermediate, and final prices were still rising only 3% and so were consumer prices. The consumer’s expectations of price increases were at 5% right near the long term average. High crude prices were a source of concern in 2007, but they were not being passed down the pipeline. Instead companies cranked up worker productivity, used substitutes and otherwise found creative ways to absorb the higher prices.

Source: US Dept of Labor BLS, PPI and CPI report, and The Conference Board

In the last year and particularly in this week’s reports, the picture has completely changed. Crude prices have gotten much worse, but the real problem is those old crude prices (the 15% increase) successfully worked their way through the pipeline. Intermediate prices at 14% have reached the same level that crude prices were a year ago, and final finished PPI prices are at 9%. Prices are moving down the chain of production.

The consumer has seen prices rise 5% and their expectations have become unhinged. They now expect prices to rise by 7.7%. The previous high over the last 20 years has only been 6.4%.

Source: The Conference Board

It’s the worst of all situations for the Fed. We are in a recession and have spiraling inflation. The Fed is caught between their dual mandate to foster full employment and maintain price stability.

Companies have two ways to play this:

a) raise prices, as doing so won’t attract much attention, or
b) make as much noise as you can about the fact that you are not raising prices, since fewer and fewer of your competitors can say the same.

In our weekly “Ask the Economist” feature, our resident Economist, Mike Donnelly, will be tackling your questions about the economy. If you’ve got a question — and no topic is too big or small — you’d like him to field, e-mail us at economist@pbp.com or leave your queries in the comments section.

Tags: Crude prices, Inflation, Intermediate prices