Expecting a PPI Shock

by: Mijka Samora

If you look at PPI (producer price index) inflation in the United States, you can see that the latest reading for the past 12 months is 6.9%. This number is bad enough, but the six months to the end of March were even worse, with inflation running at an annualized rate of 11%. The next two or three readings are likely to show an acceleration of this number because crude oil has risen 20% since the end of March.

PPI also includes weightings from agricultural commodities which have been on a tear in recent months but have somewhat retreated in April. A good measure of global food prices is an index produced by the Food and Agriculture Organization of the United Nations. The FAO food price index peaked in March and shows a very modest decline of less than 1% in April. Although some food commodities have seen bigger price declines in April, for example rice down 20%, overall food prices are unlikely to offset the surge in energy prices for April and May PPI figures.

The Fed is dancing around reality by conveniently ignoring food and energy inflation but a rising PPI will have one of two consequences. It will either force the Fed to raise rates again, or it will result in a margin squeeze for a large number of companies. Either outcome is negative for the equity market.