Service Sector Inflation Ticks Up

The headline number for this morning's PPI report was an 0.6% decline in the price of finished goods less food and energy ("core PPI"). In fact, core finished goods PPI has fallen for 4 out of the past 6 months. So if we just look at this number, inflation seems like it isn't a problem,

However, I prefer to look at a different statistic in the PPI report--the PPI for traditional service industries. Never heard of it? You are not alone. Starting a few years ago, the BLS aggressively broadened its coverage of the service sector. In particular, the "traditional service sector" includes everything from telecommunications and web search portals to health care to banking to management consulting to fitness centers.

So now the BLS publishes a PPI for these service sector industries (it's at the back of the report, pp 20-21). I wrote about the service sector PPI on my blog in February, in a post entitled "The PPI says: Service Sector Deflation is Almost Here."

Now, we have a really big divergence in the path of the core finished goods PPI and the service sector PPI. Core goods inflation is collapsing. But services PPI is slowly ticking up.

I think the service sector PPI is a better measure of the underlying inflation rate, because it covers a broader swathe of the economy. So this chart tells us that inflation is slowly starting to recover.

Source: http://www.businessweek.com/the_thread/economicsunbound/archives/2009/11/service_sector.html

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