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Who absorbs the price jumps in raw materials?

PPI price pass-through in the production process

FRED has a treasure trove of data to help us understand the pricing of goods in the U.S. For example, there’s the producer price index (PPI) and the consumer price index (CPI). The PPI measures how much producers charge for their products, while the CPI measures how much households pay for those products. For this post, we’ll stick with the PPI.

The PPI measures not only sales of final products to businesses but also sales that happen throughout the production process: raw goods, intermediate goods, components, etc.

Now, the beauty of FRED is that you can choose your data and the way you display it. The PPI data above are organized in four distinct stages along the production process, from raw materials to final product. What’s striking in the graph is that we can clearly see fluctuations in the cost of raw materials for stages 1, 2, and 3 but not for stage 4. Stage 4 is quite steady. According to the Bureau of Labor Statistics, industries assigned to stage 4 primarily produce output that is consumed as “final demand,” which may have obstacles the other three stages don’t have.* For whatever reason, the producers at this stage absorb the price fluctuations of inputs—which is something in economics we call “limited pass-through.” A similar mechanism occurs when fluctuations in exchange rates or import tariffs affect foreign goods: Not all input price changes are reflected in retail price changes for those goods.

Some goods and services consumed by “final demand” businesses at stage 4 are motor vehicle parts, commercial electric power, plastic construction products, biological products, beef and veal, engineering services, machinery and equipment wholesaling, long distance motor carrying, and legal services.

How this graph was created: Starting from the PPI release tables, select Table 7 and then select the series you want displayed. Finally, click “Add to Graph.”

*By the way, the BLS describes the first three stages as follows: Industries assigned to stage 3 primarily produce output consumed by stage 4 industries; industries assigned to stage 2 primarily produce output consumed by stage 3 industries; and industries assigned to stage 1 produce output primarily consumed by stage 2 industries.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: WPSID511, WPSID521, WPSID531, WPSID541

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