Headline Inflation Pushing Up
Today's release of the Producer Price Index (PPI) for April again reinforces the pattern of higher inflation. The year-over-year unadjusted producer price increase was the largest since September 2008:
"The Producer Price Index for finished goods rose 0.8 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.7 percent in March and 1.6 percent in February. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.3 percent in April, and the crude goods index rose 4.0 percent. On an unadjusted basis, prices for finished goods moved up 6.8 percent for the 12 months ended April 2011, the largest year-over-year gain since an 8.8-percent increase in September 2008."
The chart of today is a COMPOSITE INDEX of the Producer Price Index AND the Consumer Price Index, which will be released tomorrow. The reason I created a composite of the two indexes is that if we are going to talk about inflationary pressures we need to see them from both the corporate side and the consumer side. The chart clearly shows that the headline inflationary pressures are coming from the areas most affected by rising commodity prices - it is hitting the manufacturers in their costs and the consumer in their wallets. However, once we remove the commodity components we do find that other area's of the economy are still having trouble and are still at low inflationary price levels.
The important take away from the chart today, however, is that the majority of the time when headline inflation starts approaching current levels the economy tends to run into problems. These data points continue to support our view that the economy will be running into tougher times later this year or in 2012 which could be detrimental to stock investors not paying attention to their portfolios. As we finish up earnings season in the next few weeks and get the final numbers in we will be able to see how much these pricing pressures have affected corporate profit margins.