In our recent joint webinar, ITR President Alan Beaulieu and I commented on how "slaying headlines" is one of our favorite sources for blog topics. Typically, we react to a headline that mischaracterizes or exaggerates a particular trend or data point, and we take the time in our blog to identify where the analysis went wrong and explain what is actually happening.
This post will be a little different. Consider it a preemptive strike.
During the next several weeks, we are going to start getting data points for March and then April. These data points will be compared to the catastrophic and, in many cases, unprecedented declines that occurred in March and April of 2020 as COVID-19-related shutdown orders brought economic activity to a screeching halt. These comparisons will yield some gaudy month-over-month growth rates and will likely elicit similarly gaudy headlines.
Take inflation, for example, which is already top of mind for most of our client base. Yes, inflation pressure is building, driven by both increasing demand and supply chain issues. Many of the latter are lingering from last year's COVID-19-related capacity and productivity declines, which have left several industries playing catch-up.
The US Producer Price Index data for March 2021 was just published, showing a 5.9% increase relative to March 2020, the sharpest month-over-month increase in over nine years. Rising Prices are typical during periods of business cycle rise, particularly following a recession. Much of this increase is what I would classify as organically derived, stemming from increasing demand as the US economic recovery gains steam.
However, we also saw pricing declines occurring at this time last year as COVID-19 shutdowns ravaged the US and global economies, making for a smaller denominator against which to compare March 2021. This important caveat will likely not receive as much attention as the overall headline. Food for thought: when the monthly data for Producer Prices fell in March last year at the beginning of the recession, it was the sharpest February-to-March decline in the PPI's 74-year data history, and by a significant margin, I might add.
This is only the beginning, as the data points for April 2020 were, by almost every economic metric of note, substantially worse. Thus, we will see even more outrageous month-over-month comparisons as April 2021 data trickles in. Sticking with the PPI, the April 2020 figure was down more than 5% from the same month a year prior. If monthly price levels increase even modestly this April, and I think it’s a safe bet that they will, it will likely yield a month-over-month increase approaching 10.0%. This will make for eye-popping headlines that will likely draw many folks to the conclusion that the US is careening toward Venezuela-esque levels of inflation.
Leveraging ITR’s 3/12 and 12/12 rate-of-change methodology is a great way to stay grounded in the face of volatile monthly data points. These rates-of-change smooth out the volatility of monthly data and show the true underlying trends that will be impacting you and your business. Keep that in mind, as we are sure to field some crazy data points in the weeks ahead.
Connor Lokar
Senior Forecaster