One big consequence of a weak U.S. dollar will be inflation. On Tuesday, the Labor Department reported that the Producer Price Index (PPI) rose a whopping 1.7% in August–including an 8% jump in energy prices! This should not come as a surprise. Nearly 80% of the world’s commodities are priced in U.S. dollars, and a weak greenback naturally boosts the price of goods like crude oil, coal and other materials. The PPI reading is just a confirmation of this trend.
Other details of the report show that the price for raw materials rose 3.8%, while finished goods rose 1.7% and food prices rose 0.4% in August. That’s a clear upwards trend. And what’s more, excluding food and energy, core crude good prices rose a whopping 6%–the biggest increase in a year.
It’s important to note that the PPI is a “producer” price index. That means that this is the cost for businesses and manufacturers. The CPI, or Consumer Price Index, is a measure of how much more the average shopper is paying for these items. And so far, it appears that few businesses are passing on these inflated prices to the U.S. consumer. In fact, CPI rose just 0.4% in August–and that was driven predominately by a 9.1% increase in gasoline prices. Core consumer prices, excluding food and energy, rose only 0.1%. Overall, the core CPI is up 1.4% in the past year, the smallest year-over-year gain since February 2004.
But how long can this last as businesses are shouldering more and more of the cost? Since owners’ equivalent rent (hotel, housing and rental costs) accounts for approximately 40% of the CPI, consumer prices are not expected to rise significantly as long as there is excess capacity in hotels, rental properties and unsold homes. However, as the U.S. dollar continues to weaken, wholesale inflation is sure to take hold and drive up the price of regular goods.