PPI of chemicals and metals are likely driving CPI

In the previous post, we showed that the CPI has been following the PPI since 2000 with a reduction factor of 4.4 and a constant of .067, i.e. that the CPI/PPI regression shows that if to multiply the change in CPI by 4.4 and subtract 0.067 one obtains the PPI with the coefficient of determination of Rsq=0.83. 

The PPI (of commodities) has many components and we have chosen Chemicals (06) and Metals (10) as most relevant to the dramatic changes in the commodities supply. Fuels were also analyzed in the previous post. Figure 1 compares the inflation rate (m/m on a yearly basis) of the PPI and Chemicals. One can see that the overall PPI practically coincides with the Chemicals PPI over the whole period after 2000. Chemicals have a weak reaction to the economic slack in 2020 and extraordinary reaction to the changes in natural gas and other energy sources in 2021. The rate of PPI inflation reaches 24% as well as the rate of Chemicals PPI inflation. A small drop at the end of 2021 might be a trend or tern to the growth depending on political and economic events.

Figure 1. PPI and Chemicals PPI inflation rate after 2000

The PPI of metals is more sensitive to economic and political forces. Figure 2 shows that the inflation rate if the PPI of metals is approximately 2 times higher than that of the overall (commodities)  PPI. Figure 3 illustrates the fit between the curves when the PPI of metals is divided by 2. The resulting fit is the same as in Figure 1.  

With the increasing price of natural gas and electricity, the PPI of metals will likely suppress metal production of all kinds. The PPI inflation will grow and then lead to the CPI growth at an accelerated rate. All these factors will likely result in a deep recession.

Figure 2. PPI and Metals PPI inflation rate after 2000

Figure 3. PPI and corrected Metals PPI inflation rate after 2000

CPI and PPI inflation in the USA. Energy prices

The BLS publishes the CPI and PPI (commodity data) estimates at a monthly basis. One can estimate the inflation rate on a monthly basis as well using the monthly estimates separated by one year period. For example, the rate of inflation in December 2022 can be obtained as the difference between the CPIs published in December 2022 and December 2021 divided by the CPI in December 2021. This is a standard definition of inflation. Figure 1 presents the rate of CPI and PPI inflation in the USA since 1967. One can see that in the past the PPI and CPI inflation rates were approximately the same. Essentially, they were practically equal between 1975 and 1982. The reason they started to deviate is a dramatic change in their definitions around 1980. The CPI inflation now looks much lower than the PPI.

Figure 1. CPI and PPI inflation rate

To understand the current link between the CPI and PPI one can apply simple regression analysis and obtain regression coefficients which make both curves closer to each other in the sense of RMS distance. Figure 2 depicts the original PPI curve and the corrected CPI_C curve, where

                                            CPI_C = 4.4*CPI-0.067

The regression equation was obtained for data between 2000 and 2022. It means that the PPI is 4.4 times the CPI, but there is a constant in the equation which defines some permanent difference between the CPI and PPI. 

Figure 2. PPI and  CPI infation rate. The latter is corrected to match both curved after 2000

Figure 3 illustrates the most recent period after 2006. One can see that the curves are extremely well correlated (Rsq=0.83) and practically synchronous. The latter observation is important because the change in the prices of commodities has an immediate impact on consumer prices. 

Figure 3. Same as in Figure 2 for the period after 2006

It is clear that the PPI curve demonstrates some pivot to the downward move in December 2021 and January 2022. The growth rate of commodity prices decelerates after it reached the peak of 25% per year. The CPI curve will likely change the direction any time soon in case the PPI growth will continue the deceleration path. 

The same analysis is helpful in the comparison of energy prices. Figure 4 presents the PPI of "Fuels, related products and power"  and the energy CPI after 1967. The CPI is corrected by a factor of 1.55 in order to fit the curves after 2000. One can see a dramatic difference in the curves match compared to Figure 2, where two periods before and after 1983 are quite different. For energy, the curves have an excellent match in both periods. This means that the definition of energy-related CPI and PPI did not change much around 1980.

Figure 4. The PPI of "Fuels, related products and power" and the corrected energy CPI 

Figure 5 illustrates the period after 2000 and demonstrates that the price change in energy-related commodities is reduced by a factor of 1.55 before it comes to the consumers. The most recent period shows the rates of PPI inflation from  -40% to +55%. This is similar to the period between 2007 and 2009. The fuels PPI shows some signs of decline since the end of 2021. The current inflation rate came from the economic recovery processes in 2021 and was also driven by money printing. More money printed and injected into the US economy will reverse the current downward trend in the fuels  PPPI and energy CPI.  If to stop the money printing process the energy price will drop dramatically and one can expect a long deflationary period. The extended supply of extra expensive goods and services will not match the demand without extra money injection. This is the main cause of the recession.

Figure 5. same as in Figure 4 for the period after 2000

For Russia it is the best time to ruin Ukraine economically

As I mentioned before, the economic failure of Ukraine is the aim of Russia. Panic of the imminent war ignited by the US and the West as a whole made its work and Ukraine lost tens of billions of dollars and have a negative rating for investors. This is good news for Russia to make an important step to add some uncertainty in the heads of politicians and militaries - recognition of the Lugansk and Donezk Peoples Republik. The war against the Republics is not an option anymore and the Ukrainian army lost its aim and nerve . Essentially, this army is an aimless collection of people with dangerous weapons most appropriate for small rebel groups to loot as it was in the Russian Empire Civil war 1917-1923s. 

The next obvious step for Russia is to switch off the light and allow robbery throughout Ukraine. Diesel fuel (for tanks, for example), electricity, uranium rods for the power stations, coal, etc. is supplied mostly by Russia (4 bn dollars, approximately). I do not say about obvious energy source - natural gas not transported through the Ukrainian pipeline leg. The best time to strike, as I said before, is the next spring cold wave. People will start fighting for energy. In the panic or hysteria state, it is a likely outcome.  If President Zelenskii will be evacuated by the West - this will be the best signal to star robbery. 

 

The reason why EU security does not depend on the EU

The EU complains that Russia should discuss European security with the EU, not with the US. This is a very strange complaint considering the fact that Russian security ultimately depends on the presence of nuclear weapons in Europe. This weapon is fully controlled by the US together with the cruise missile launch facilities in Poland and Romania, and thus, the EU has no relevance to Russian security as such. The small details of mediocre local forces in some European countries make no difference to Russian security. Only screams. 

Scholz and genocide in Donbass. Germans are still Nazists

Chancellor Scholz commented on the statement of President Putin that the Ukrainian Nazists killed the civilian population in Donbas and this is the genocide of the Russian population. Scholz said that this is "unacceptable". Kremlin reacted appropriately:

“This is not for German leaders to make a joke of genocide issues,” the Russian foreign ministry said, according to Interfax. 

Germans are still Nazists and support Ukrainian Nazists with swastikas covering their bodies (ignored by the West) because they are Nazists. The genocide of  Herrero and Nama in Namibia in the 19the century was just the beginning of the long genocide story of Deutch Leute. It seems this story will not be over before the Germans understand their responsibility or disappear. 

Inflation in the USA: highly transient and not persistent

The consumer price index for all items changed in the USA by 7.5% from the previous year. This is the highest change since the 1980s. One may overestimate the importance of this jump in prices for the economy. The situation in the 1970s and 1980s is quite different from the current one, however. The historical inflation was driven by economic factors - dramatic growth in the labor force associated with the growth in the labor force participation rate for women. This process ended when nearly 90% of women joined the labor force in the early 1980s compared to less than 50% in the 1960s. The current situation with the labor force is the opposite (the participation rate has been decreasing since the late 1990s) and the real economic forces suggest deflationary processes. 

Money printing is the reason for the observed price increase in the USA. This time the money was delivered directly to people and businesses unlike during the period between 2008 and 2020. Essentially, the same volume of goods and services was matched by a larger amount of money. As a result, the price increased by the printed amount as was shown in my previous posts. This effect is monetary but has no economic reasons behind it. The price can increase only once without further money printing. Moreover, the increased amount of money was paid once and cannot be repeated. The price jump was a one-off event and related inflation is transient. Therefore, there are two reasons for the prices to plummet - monetary and economic. Some kind of idea storm ...

The most efficient policy for Russia is to retain the highest tension with Ukraine with the help of West 3. Ukraine disintegrates with increasing speed

 The Ukrainian economy disintegrates at an increasing rate due to the efficient actions of the West. The chaotic events with evacuating Ukrainian citizens and businessmen, western embassies, and local authorities make the Russian position stronger every day. Zelenskii is crying already that there is no Russian threat and everything is under control. Biden says that the invasion is inevitable in a few days. Russia waits before the next freezing weather condition but it is not to invade. The reason is simple - stop the energy supply to Ukraine to destroy the energy system and stop nuclear stations. This will ruin Ukraine as an economic and social system and the army will freeze. Just a few cold days.