How the Consumer Price Index Impacts the Cannabis Industry Photo: Sharon McCutcheon/Unsplash
November 16, 2021

The Consumer Price Index (CPI) for all items jumped 0.9% in October with significant increases noted in the energy and energy services (utilities) sectors, food prices, and new and used car prices. Energy prices rose 4.8% in October with gasoline up 6.1%, fuel oil up 12.3%, and electricity up 1.8% on the month. Ex-food and energy costs, core inflation is up 4.6% in the previous 12 months.

Of interest to Cannabis Benchmarks readers, overall energy prices are up 30% over the past 12 months, with energy commodities, gasoline and fuel oil, up 49.6% and 59.1%, respectively. Energy services (utilities) are up 11.2% year-on-year. The All Items Index – which includes energy and food prices – is up 6.2% over the past year, marking the largest price surge in 30 years.

The Producer Price Index (PPI), prices at the wholesale level for raw and partly finished goods, increased 0.6% in October and is up 8.6% year-on-year. About three-fifths of the monthly increase in producer prices is due to the 4.8% rise in energy prices. A surge in producer prices is often referred to as “pipeline inflation” and is a forerunner of increases in CPI. Rising PPI in the energy sector signals higher energy prices are expected at the consumer level including gasoline, piped gas (heating), and utilities.

Cannabis businesses will have to navigate higher energy costs going forward and build their margins to accommodate increased costs, which may ultimately help steady falling cannabis prices to some degree. Downward price pressure on outdoor grown product is likely to persist, however, as energy costs are a significantly lower part of production costs and this year’s harvest has already been brought in.

The Federal Reserve (FED) sees pandemic-induced supply chain disruptions as a key inflation driver, increasing production and manufacturing costs within key U.S. industries including energy commodities. However, the FED has not indicated it will raise interest rates as it considers supply chain disruption a “base effect” of the pandemic and transitory in nature. In short, the FED sees drivers of current inflation as short term and is loath to raise interest rates, increasing the cost of consumer credit, as the U.S. continues to attempt to emerge from the COVID-19 pandemic.