17 OCTOBER 2024
Where US producer prices (PPI) go, consumer prices (CPI) tend to follow.
The chart below shows US CPI (blue line) versus US PPI (red line) over the past 10 years. There is an incredibly tight correlation between the two lines with the CPI measure typically lagging the movement in PPI by just 1 month.
This should come as no surprise.
The PPI index captures changes in the input costs of goods and services across the economy so they are heavily linked to how consumer prices are evolving just a few weeks later.
And with global commodity prices softening due to slowing GDP growth (particularly in China) US PPI is unlikely to strengthen meaningfully anytime soon.
This should embolden the Federal Reserve (and other Central Banks) to carry on cutting interest rates well into 2025, arguing for lower short-dated bond yields and a bid for longer-duration risk assets.
However, there will come a point at which the lower borrowing costs ignite a rebound in economic activity and that tends to lead to rising inflation.
This is unlikely to be a near-term threat, but something investors should consider as we head into the third year of this equity bull market.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed are a matter of opinion but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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