Inflationary Trends Subside while Plastics Manufacturing PPI Reflects Supply and Demand Dynamics

July 24, 2023

The most recent CPI data in June suggests that inflationary pressures in the economy are diminishing. However, it is important to acknowledge that further decline in inflation is still necessary.

By Perc Pineda, PhD
PLASTICS Chief Economist

Pundits have scrutinized the Federal Reserve’s characterization of inflation in 2021 as transitory, suggesting that it would be a temporary occurrence before stabilizing. While inflation based on the Consumer Price Index (CPI) is not the Fed’s preferred measure for monetary policy adjustments, the most recent CPI data in June suggests that inflationary pressures in the economy are diminishing. However, it is important to acknowledge that further decline in inflation is still necessary.

Consumers and the prices they pay

In June, headline inflation, as measured by the year-on-year change in the CPI, reached 3.0%, showing a significant improvement compared to the 8.9% inflation recorded in June 2022. However, certain components of the CPI continue to surpass 5.0%. Notably, food prices rose by 5.7%, electricity by 5.4%, food away from home by 7.7%, shelter by 7.8%, and transportation services by 8.2%. Aside from the elevated prices of food and shelter, one could argue that the strong demand for services is still causing upward pressure on prices. Energy commodity prices experienced a decline of 26.8% in June. Core inflation, which excludes volatile food and energy prices, remains high at 4.8% in June. Despite a decrease in CPI-based inflation estimates, they have remained above the Federal Reserve’s 2.0% target since March 2021 and April 2021 for headline and core inflation, respectively.

Prices received by domestic producers

Shifting focus from the perspective of consumers (CPI) to that of sellers, the Producer Price Index (PPI) for final demand, as reported by the Bureau of Labor Statistics (BLS), showed a modest increase of 0.1% in June—a significant drop from the 11.2% seen in June 2022. A closer examination of the PPI reveals that producer prices in the plastics industry continued their downward trend in June 2023. The PPI for plastics material and resin manufacturing declined for the second consecutive month, dropping by 1.3% in June. Compared to the previous year, plastics material and resin manufacturing prices were down by 10.8% in June, continuing the downward trajectory that began in August 2022.

In the plastics bottle manufacturing sector, the PPI experienced a slight increase of 0.6% in June, remaining virtually unchanged from May. However, when compared to June of the previous year, it marked the first decrease since March 2021, with a decline of 1.1%.

The PPI for plastics packaging film and sheet manufacturing rose by 0.4% in June, reversing the 0.8% decrease observed in May. Nevertheless, prices in this sector decreased by 1.4% in June compared to the previous year, continuing the downward trend that started in October of the previous year.

Keeping an eye on the data

Updated monthly by the BLS, the PPI for various sectors of plastics manufacturing, including plastics water pipe, thermoplastics resins and plastics materials, and others, can be accessed from the PLASTICS website. Plastics manufacturers should be aware that the retreat in PPI is a consequence of increased supply and weakened demand, with supply chain issues no longer posing a significant concern. However, it would require a significant external shock, such as disrupting weather conditions affecting resin production, for instance, to cause a substantial change in the supply. Moreover, it is important for plastics manufacturers to understand that changes in the PPI reflect the evolving demand for plastics across various end-markets and applications. By monitoring these dynamics, manufacturers can gain valuable insights into market trends and adapt their strategies accordingly.