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Is the PPI going crazy?

The graph above shows the producer price index since 1913. It measures the cost of items used in the production process and is thus different from the consumer price index, which measures the cost of final goods to consumers. Two aspects of the graph are striking: Prices have increased quite a bit since 1913, and prices in recent years seem to be subject to wild fluctuations. There’s no doubt the ups and downs of commodity prices such as oil and metals have an effect here, but are the recent years really as wild as they look?

In part, the second observation is a consequence of the first. Prices now are roughly 18 times greater than those in 1913. So a 1% increase will look 18 times larger now than before. This “optical illusion” can be fixed in two ways. 1. Look at percent changes. The first graph below shows these changes from the same month a year before, which takes care of any potential seasonal effects. Recent fluctuations are indeed somewhat larger than in preceding decades, but they’re nowhere close to the large fluctuations in the first years of the series. 2. Look at natural logarithms. The second graph below includes a transformation so that any change in the series looks the same in relative terms: that is, a 1% increase looks the same in 1913 and 2015. Again, we see that the fluctuations were much larger in the early years.

How these graphs were created: Search for and select the PPI for the first graph. Change the units to “Percent Change from Year Ago” and you have the second graph. For the third graph, start with the first graph, choose “Create your own data transformation,” and select “Natural Log” among the transformations.

Suggested by Christian Zimmermann

View on FRED, series used in this post: PPIACO

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