Inflationary Data Makes Clear Why Fed Only Cut 25 Points

Following Tuesday's 25 basis point cut in the Fed Funds rate, most investors were disappointed that the Fed did not cut enough. However, the releases of November's PPI and CPI show that the Fed probably had an early peek at these numbers and decided that they could not cut 50 basis points in the face of such elevated inflation levels.

Thursday's PPI showed that year/year producer prices rose by 7.2%, which was the largest gain since 1981. Today's CPI, while high, was not nearly as elevated. On a year/year basis, consumer prices rose 4.3%, which was the highest reading since June 2006.

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The biggest question on the inflation front now concerns whether the high levels of producer prices will work their way into higher consumer prices. One line of thinking argues that if producers are experiencing higher prices, it's only a matter of time before they start raising prices. However, if we overlay the historical PPI and CPI on top of each other, we see that instead of spikes in CPI following spikes in the PPI, they usually both rise and fall in tandem with each other.

Comments

[chart checker]

Re: "they usually both rise and fall in tandem with each other."

Yeah, on a graph that spans 37 years. These charts could easily hide a 6 month lag. How about showing, say, a 5 year chart?

[deano]

This really demonstrates why the biggest mouths in analyzing the market, really don't have any idea what they are talking about. It would really help to have someone who had a balanced view of what is going on.

[Georealist]

My take on the recent Fed cut and your article are a little different. As for the Fed..they MAY have looked at the PPI and blinked...on the other hand, I think it just as likely they wanted to keep another cut in their pocket because they reasoned that with weekly bad news on the doorstep a half point slash might easily be undone before the benefits accrued. With the Fed its always best to remeber that Our Pain is not necessarily Their Pain.
As for the article...maybe the CPI follows the PPI or maybe not..in any ironclad cause/effect relationship. Consumers determine whether their going to buy into price hikes at the stores and markets..and I don't see much of that happening.