Friday, October 12, 2012

The Squeeze

We are finishing one of the worst drought seasons on record.  Kansas, Oklahoma, Arkansas, Missouri, and Nebraska all have significant geographical area that has been described as under exceptional drought conditions by the USDA.  Corn and other agricultural prices are already up.
Some of these prices have already made their way to the grocery store.  Corn-on-the cob prices were significantly up this year, but we haven't seen the impact on our wallets yet because consumers relationship to the supply and demand of commodities often have many buffers.  These buffers have sticky prices and menu costs of their own, and my question today is how easily can these prices be passed on to consumers, and are there any factors which influence this.

Wheat Field with Cypresses, Vincent van Gogh
The Bureau of Labor Statistics does several measures of price stability.  The two main types are the Consumer Price Index (CPI) and the Producer Price Index (PPI).
Figure 1

The CPI measures the price level that the average consumer pays. These purchases include food, energy, commodities, items such as cars and apparel, and services such as transportation services and medical care. These different items are weighted in a manner that is meant to be reflective of the average consumer.
The PPI is an improvement over past Wholesale Price Indexes.  The Producer Price Index notes prices at different stages of development from commodities to intermediate goods to finished goods.
It is not helpful to directly compare the CPI and PPI because it is like comparing apples and oranges.  The CPI includes imported goods that the consumer purchases, while even if imports are component parts of intermediate or finished goods, the PPI measures domestic output prices.  The CPI becomes a very good measure of the general price level (inflation or deflation) and the PPI is also an aggregation of prices, but because they are not even close to paired price levels.
I am interested in this relationship not because it will give us an apples to apples comparison of these two concepts but because it gets us in the ballpark of an important concept: the squeeze.  In the relationship between the consumer and the producer... who is being helped more or harmed more by the dollar's fluxuation.  With that in mind, I present my final graph which is the relationship between the PPI and the CPI.  Of course, this is meant to be useful only as a blunt instrument so directions are interesting, +/- 0 is interesting, but not necessarily the exact points.
Figure 2

There are many interesting things to draw from Figure 1 and Figure 2.  In the 1970's there are two major inflation periods with a hump in the middle to mark them.  In Figure two, The Squeeze only notes the first one.  Why is this?  Did producers become better at passing on inflation... or is something else going on?  Also, in the 1980's, The Squeeze observes this in the negative column which might indicate that producers were experiencing significantly more disinflation and deflation than consumers.  This is just a couple examples of how this could be an interesting relationship.
I'm also on the look out for a data set that makes this concept of prices that producers are paying versus prices that consumers are paying even more clear because it is a relationship that is worth paying attention to.

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