Producer prices — that is the price of raw materials, plus services like health care and hotel accommodation — jumped more than expected last month. The Labor Department released its September Producer Price Index Wednesday. And the higher prices are actually good news for consumers and the economy.
While consumers don’t exactly celebrate when they hear that prices are rising, today’s higher Producer Price Index is actually a sign that the economy may be picking up.
The cost of some raw materials is increasing because of higher demand from factories that are ramping up, according to Camelia Kuhnen, professor of finance at the University of North Carolina.
“They’re producing more because they expect higher consumer demand,” she said. “For me, this is good news for the broad economy.”
Good news because factories cranking up production might need to hire more workers, eventually.
“Or in this case, because the recession happened so quickly,” said Chris Rupkey, chief economist at the global financial group, MUFG. “Also we’re looking for companies being able to hire back the workers that were let go during the recession.”
And producer prices only rose four-tenths of 1% in September. Although it was the first year-on-year increase since March, it’s not clear that the producer price hikes will find their way down to consumers. Stephen Cecchetti, an economist at Brandeis University, looks at what would happen if, say, chicken producers raised their prices.
“If the price of the chicken goes up, the price that I pay in my grocery store might go up, but it might not,” he said.
Cecchetti said maybe the grocery store substitutes, buying less chicken and more beef or tofu, because your store doesn’t want to lose your business. So it may just swallow the higher cost of chicken.
“It’s sometimes just the case that you can’t pass on the price increase,” he said.
Cecchetti said the ideal is stable prices. That allow consumers and businesses to plan. September’s Producer Price Index could be a step in that direction.
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