Jun

17

Here's from today's (May's) producer price report:

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Greg Van Kipnis replies:

Understanding the "pig" in the python phenomenon, as Eastsider refers to it, is instructive.

The point he is implicitly making is that as the lump in prices (the pig), stemming from energy and ag prices, works its way through each stage of value added in the US manufacturing/services production and distribution machine (the python), raw material prices diminish in importance.

Unit labor costs, offset by productivity gains, and profit margins become the dominant component of prices in the final consumption market. In our competitive markets, labor costs and profit margins are "compressible" and productivity gains are "irrepressible." Then there is the not so small matter of substitution effects to lower prices even more. As the cost of one ingredient rises, every businessman will press his suppliers to either lower their prices or find other substitutes for the other ingredients that were purchased earlier. In the end, consumer prices (and industrial prices) become "well contained."


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