Telling Inflationary Indicator: Latest Producer Price Index Alarming

The Bureau of Labor Statistics this morning reported that prices paid to U.S. producers showed another large jump—a whopping 1 percent rise—in January 2008, after climbing 2.6 percent in November of last year (after a slight decline in December). Over the past 12 months, the producer price index, or PPI, the broadest measure of the rate of inflation for finished goods, increased by 7.4 percent, the largest year-over-year increase since October 1981.

Much of this increase was caused by higher oil and food prices. And most tellingly, much (though not all) of this price increase at the producer level will end up as higher prices for consumers at the gas station, in supermarkets, and in restaurants. Already struggling low-and moderate-income families will be disproportionately affected by this inflationary jump as they tend to buy more gasoline and more food, relative to their income, than higher-income ones. This is especially worrisome because these are the very same families who already are economically very vulnerable after experiencing larger income drops than higher-income families over the past seven years.

Low- and moderate-income families also already tend to have fewer economic means of protecting themselves from inflation, such as health insurance, pensions, and personal savings. As the specter of stagflation—a recession coupled with inflation—rears its ugly head, policymakers need to focus on economic recovery efforts that will foster more innovation—and thus higher productivity growth—and allow lower-income and moderate-income families to better share in the fruits of economic growth.

Higher productivity growth means the economy can grow faster without adding to current inflationary worries. It would allow the Federal Reserve to take it easy on interest rates, just as was the case in the 1990s. Similarly, letting low- and moderate-income families share equitably in renewed productivity growth and economic prosperity would reduce their economic and financial insecurities, which have risen sharply in the past seven years.

Over this period the benefits of economic growth went largely to those in the top fifth of the income distribution who earn about $100,000 or more a year. If instead economic growth translates into more and better jobs for the economically more vulnerable, inflation would then do less harm to these workers while also boosting their incomes so that they can spend, save, and invest in their own futures.

The recent slowdown in economic growth and the rising number of economic indicators pointing to a perhaps sharp economic decline this year means that the harm done to low- and moderate-income families over the past seven years will not be a short-term phenomenon. Our country needs to develop long-term economic solutions. The economic stimulus package recently signed into law that will go into effect in the coming months is a good first step, but policymakers cannot stop there. A sustained economic recovery effort focused on boosting equitably shared economic growth needs to follow.