When PPI Actually Does Matter
PPI is not a particularly useful indicator, at least compared to the tremendous weight that market participants often place on its release. Today, the market managed to avoid getting excited about a higher-than-expected rise in PPI and core PPI, which is normally the proper response. It turns out that PPI doesn’t tell us much of anything that CPI does not tell us with a whole lot less noise. Over time, PPI might be useful as a measure of pricing pressures in competitive industries, as when compared to CPI it should indicate whether margins are increasing or decreasing. But that’s a pretty weak reason to tune in at 8:30ET on PPI day.
Today, there were other data to get more excited about and so PPI was properly overshadowed. It was interesting that the Empire Manufacturing index didn’t just decline, but plummeted (to 2.55 from 23.51, versus expectations for a near-unchanged print), and the NAHB Housing Market Index declined to 16 rather than rising to 18 from last month’s 17. On the other hand, Industrial Production was stronger-than-expected, and that let to Capacity Utilization coming in higher-than-expected. That sounds like a wash: Empire and NAHB weaker, Cap U stronger. However, Empire and NAHB were December numbers, and the Industrial Production data from November. There’s no reason to let that alarm you yet, unless you’re predisposed to that kind of thing.
However, from a trading perspective the PPI may actually matter if you believe in inefficient markets (which I do). This is because tomorrow’s CPI is going to show a rise in the year-on-year headline inflation to a positive level, somewhere around 1.8%, from last month’s -0.2% year-on-year. That’s not really super significant, and it certainly is no surprise; it happens because last year’s plunge in prices after Lehman is rolling out of the data. But what it does, following today’s PPI print, is create the illusion that inflation is suddenly accelerating. That will scare the commonfolk.
Inflation is beginning to rise, if you abstract from the aftermath of the housing bubble. Core CPI is forecast to come in around 1.8%, up from 1.7% in October; but core ex-Shelter will probably reach the highest level since 1995. So inflation is rising…but not yet exploding, which is what you would perceive if you look naively at the PPI figures today and the CPI figures tomorrow.
