If you only know how to interpret the PPI and CPI headline numbers and their m-o-m or y-o-y changes, it only shows that you don't know how to analyze the data and also don't understand their economic relationship.
Well, different people interpret the same data set differently. Therefore, I will show you how a brilliant analyst (me) does it.
Let's begin by looking at the economic relationship first.
In economic terminology, the process is depicted as follow:
CPI/PPI ----->> M1-M2 spread/3m-10y yield spread ----->> PMI ----->> GDP
http://sg-stock.blogspot.com/2019/06/the-true-picture-of-us-economy.html
Next, we can learn about PPI and CPI impacts.
In a nutshell, a producer will be motivated to produce more when the PPI is rising because of the rising profit margin while a rising CPI will sap consumer demands because it diminishes the consumer purchasing power.
When the PPI is greater than the CPI, it will motivate the producer to produce more. Therefore, this phenomenon is known as an inventory growth phase and this will increase the GDP under the investment component (See below).
GDP = Government spending + Investment + Consumption + Net Exports (X-M)
The reverse is true when the PPI is lesser than the CPI since it motivates the producer to produce lesser. Thus, this phenomenon is known as an inventory reduction phrase and this will decrease the GDP.
The most recent PPI vs CPI chart is showing that the PPI is below the CPI and is in the negative or contracting territory. Moreover, the recent upward slope of the PPI denotes that the producer is reducing the inventory passively instead of proactively (downward slope).
How true is this conclusion (inventory reduction phase)?
We can find another alternative variable (PMI inventories subindex) to verify and authenticate this.
http://sg-stock.blogspot.com/2020/08/us-ism-pmi-had-shown-great-improvement.html
The PMI inventories subindex is in a contracting mode (below 50) which also substantiates our conclusion (inventory reduction phase).
This conclusion (inventory reduction phase) is bad news for the GDP unless the other GDP components can neutralize this negative factor.
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