Inflation: Producer And Consumer Prices, Regional Outlook

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Summary

Producer prices are in an uptrend, but still contracting.

Consumer prices have picked up and could be a problem for the consumer if the economy stays weak.

The risk of high inflation is currently close to zero.

Today, we got the new producer price numbers. Producer prices (all commodities) fell 1.1% on a year-on-year basis. This is the best number since Q3 of 2014. The third quarter of 2014 has been the growth peak and the start of much slower growth.

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The second variable in the graph above displays the average of all regional prices paid surveys. These surveys are conducted in several federal reserve districts and give clear information about production, new orders, shipments and, of course, prices paid and prices received. In this case, we see that this index has pointed towards PPI deflation since 2014. The index has rallied after the first quarter of this year. Mainly because of higher commodity prices. This is no surprise since commodities are the main driver behind producer prices.

Regional surveys have more or less predicted stronger consumer prices. In all fairness, regional prices received started to go up after the official CPI number bottomed. Nonetheless, both indicators are growing since the fourth quarter of 2015.

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The two graphs above show two important things. First of all: producer prices are in an uptrend, but still in growth territory. This means that the economy is still in a weak stage. On a side note: this is confirmed by dozens of indicators. The second important thing is: consumer prices are growing.

What does this mean? Higher consumer prices in a weak economy could be seen as 'some kind' of stagflation. Both consumer and producer inflation went downhill in 2014. Both started an uptrend in 2015 with one big difference: consumer prices went up.

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The graph below shows inflation expectations. Expectations of inflation above 1.5% declined below 10% at the end of 2014. Currently, we see that inflation odds between 1.5% and 2.5% are at 30%.

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Overall, I am not impressed and not surprised. Higher commodity prices have pushed producer prices higher. Consumer prices have grown more and could be a problem for the consumer if the economy stays weak. The odds of high inflation (>2.5%) stay extremely low and are not a risk at this point.

Thank you for reading my article, please leave a comment if you have questions or remarks.

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