US PPI

Producer price index rose 1.8% in November, seasonally adjusted. Here’s the statement:

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted.
This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. The index for finished goods less foods and energy rose 0.5 percent in November.

So what does it mean? No one knows . . . yet. One month in the busy holiday season does not a trend make. But it might be pointing to a pickup in inflation (if it flows through to the finished goods). That would be a positive and a negative. It would be a positive in that it would mean that companies have pricing power, can raise the prices of goods and thereby maintain margins. It would be a negative in that Treasuries would continue selling off and rates would rise. All in all, I don’t think companies will have the pricing power to match the increase in PPI. Best Buy came out today with great numbers, except for the fact that the things people are buying are the lower margin items. If PPI goes up but companies do not have the ability to raise prices, that means pressure on margins, which are already cyclically high. Net, this might signal lower bottom line earnings, so I don’t see this as a sign of inflationary pressure. Also, with real estate still not stabilizing, owners equivalent rent will continue to put downward pressure on the CPI, and coupled with 10+% unemployment, decreased new lending, and lots of spare capacity for utilization by factories, I don’t see this as immediately inflationary.

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