It is sometimes informative to compare some of the government’s statistics in order to better understand the shape and direction of the economy.  In the accompanying Table 1,  I have put together two years (’20 & ’21) of quarterly data on the PPI, or Producers Price Index, more commonly called the wholesale price index, and the Productivity numbers for the same period.  The PPI is a forecast of where the near future CPI (Consumer Price Index) will go.  The Productivity components tell us how changes in Output and Hours Worked changed and their joint effect on productivity overall.  The numbers track the economic whiplash the Pandemic inflicted on the US.  

Look at 2020’s ‘Output’ changes.  The Pandemic hit late in the 1^st quarter of 2020.  Output is down 6.5%.  The 2^nd quarter of 2020 is when most of the tight lockdown was in play.  Output is down 37.1%!  Then, in the 3^rd quarter of 2020, output rose 43.4%!  Also note the correlated moves in the ‘Hours Worked’ part of Productivity.  That’s economic whiplash on both the workers and the producers.  In the first two quarters, as output dropped, Final Demand started to absorb the inventory left in the system.  So going into the 3^rd quarter of 2020, activity and inventory are greatly diminished and then there is a 43.4% jump in production as demand returns.

Now look at the corresponding PPI numbers for 2020.  The drop in the first two quarters is the relief of pressure on the four stages of the economy. (4 Stages Diagram)  Demand was down, so production dropped and the fall in prices throughout the stages of production, the PPI, reflects that.  In the last half of 2020, the PPI climbs slightly as the returning production begins to permeate the entire economy and take up the system slack.

In 2021, the Output part of Productivity rose over 8.0% in the first two quarters.  It slowed in the 3^rd quarter.  Note the 4^th quarter Productivity stats are not out yet.  The Hours Worked part of Productivity took off slow in 2021 but did accelerate in the 3^rd quarter.  At the end of the 3^rd quarter 2021, output is up for four straight quarters.  So, the system went from growing at the start of 2020, then virtually shuts down for four or five months, then within three months is flooded with demand and ramps up to meet it.

The 2021 PPI numbers reflect the pressure the 2020 demand, combined with its continued growth in 2021, are placing on the stages of production.  The rise of 9.7% in the PPI for all of 2021, as well as being a record, summarizes the headline problems the economy is having ramping back up.  The Pandemic produced slack in the system and in ramping back up through that situation, the critical shortage of electronic parts and the sudden wave of demand for shipping and handling all the goods being produced hit as well.

That 9.7% is extremely worrisome.  It indicates that 2022 Consumer Prices are going for a ride, and not to our advantage.  The general feeling I get is that over 2022 things will work out and the ramp-up inflation seen in 2021 will subside.  With the Fed changing to a more progressive tightening plan every month is unsettling, but needed.  It is their job to sop up the $8+ trillion of liquidity they poured into the market in the last two years.  The sooner that really starts the sooner we break the spiral in consumer prices.  If the Fed shirks its responsibility, then we have several years of tough sledding on the economic front.