AN OBSCURE STATISTIC known as the Producer Price Index, published on Friday, delivered an ominous message. The PPI tracks theprices at which business sell each other things like chemicals, machinery, fuel, foodstuffs. There are several ways to measure inflation, and the PPI is one of them. Last month, according to this latest number, it was being driven sharply upward by higher food costs -- particularly in grain, meat and poultry. Through the spring, the PPI for finished goods, which includes food, had been rising at the comparatively modest rate of half a percentage point a month. But from June to July, it suddenly shot upward 1.7 percent.
One reason was the drought and its effect on crops. Antoher was past cost squeezes on the people who raise livestock and chickens. They have been cutting production for some time, and the effects are beginning to show up in the prices. The wholesale price of poultry, in that one month alone, went up 28 percent. Food prices are notoriously volatile, and one month's statistics do not set a trend. But this number is a decidedly nasty surprise.
It still likely that the recession isnow approaching bottom and, next year, will begin a slowrecovery.
It still seems likely that the recession is now approaching bottom and, next year, will begin a slowrecovery. But economists for Goldman, Sachs andCo., the investment banking firm, suggest that there's another possibility -- not a probability, they emphasize, but a possibility. They call it the double-dip recession. The present recession might be followed by a brief upturn and then further decline. Why? The main causes would be the slowing now visible in the European economies and the effects of the droughton inflation in this country.
That unpleasant possibility illustrates a point that we have occasionally made in this space.The familiar and conventional techniques of economic policy are no longer reliably available. In past recessions, the government could safely increase spending and reduce interest rates to stimulate the economy and create jobs. The danger of inflation would only come later, well into the recovery. But in this year of recession, two important sources of inflation have been entirely beyond the reach of the government -- oil price increases abroad and bad weather here inNorth America. If the inflation rate now rises, interest rates will certainly go up regardless of slackin the economy. That would severly weaken any recovery ahead, just as economic trouble in Europe -- translated into falling demand for American exports -- would also weaken it.
The double dip is still unlikely, butevery hint of high inflation next winter makes it lessunlikely. The PPI for foodstuffs is only one small sign of change, to be sure. But it is change in the wrongdirection.