Why the PPI Advance Isn’t so Bad


What’s The PPI?

The latest reported Producer Price Index numbers came in for extra scrutiny recently, as investors try to understand whether inflation pressures are temporary, as the Federal Reserve insists, or more persistent, as Wall Street bears caution.

Real Money's Jim Cramer and the Action Alerts Plus team took a look at the latest report as well in a piece here. ”The U.S. Bureau of Labor Statistics (BLS) reported on Friday that the seasonally adjusted Producer Price Index for final demand increased 0.7% in August, above expectations for a 0.6% advance. This follows a 1.0% rise in July.”

Cramer and the team noted that “Over the last 12 months, the PPI has increased 8.3% before seasonal adjustment, edging out expectations for an 8.2% annual advance following a 7.8% rise for the 12-month period ending in July. This was the largest increase since 12-month data was first calculated in November 2010.”

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The PPI is released by the Bureau of Labor Statistics every month. Along with the CPI (the Consumer Price Index) it’s one of the two core metrics for measuring inflation across the economy at large. The difference is that the CPI measures price changes from the perspective of the buyer, how much you pay for the products on the shelf. The PPI measures price changes from the perspective of the seller, how much a business receives for the product on the shelf.

This makes the PPI a critical indicator, particularly at a time when economists are trying to understand whether the economy is undergoing illusory inflation (meaning price increases that simply appear high relative to depressed prices during the pandemic); durable inflation (meaning inflation driven by self-sustaining factors in the economy); or transient inflation (meaning inflation driven by temporary bottlenecks and hoarded cash). It is the second of these which most concerns both investors and economists. That's because durable inflation, once started, can be difficult to control.

Cramer and company were fairly sanguine following the report.

“All in all, this was a solid reading indicative of an ongoing economic recovery and we believe that the miss on core PPI should serve to keep any fears of a rapid rise in interest rates at bay,” they wrote. “While PPI may reflect costs to the producer and is a bit less of a direct read on inflation, it does provide some insight into the inflation dynamic as producers will ultimately push costs through to the consumer. That said, as has been the case, supply chain bottlenecks, which Union Pacific  (UNP) – Get Union Pacific Corporation Report highlighted at a recent conference still need to be worked out before we can really realize the magnitude of pent-up demand.”

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