Inflation Isn’t As Bad As It Looks. It’s Probably Worse.

Inflation Isn’t As Bad As It Looks. It’s Probably Worse.
Theodora Lee Joseph, CFA

over 1 year ago1 min

When you hear analysts talk about inflation, they’re generally referring to the consumer price index. You’re probably already familiar with the CPI, which compares what consumers are currently paying for a basket of goods (excluding more volatile food and energy) to what they were paying the year before. But there is another useful measure: the producer price index (PPI), which tracks what the companies that offer those goods and services are paying for their own materials.

As you can see in the chart above, the CPI (green line) hasn’t historically strayed too far from the PPI (blue line). That stands to reason: companies tend to adjust their prices in line with inflation and no more, or else risk losing customers to competitors. But right now, the PPI is storming ahead of the CPI, outpacing its sister measure by a massive 2.6%.

That leaves companies with a decision to make: either they keep raising prices and risk losing an already cash-strapped customer, or they keep prices low and absorb the bruising effect on their bottom lines. For some companies, this isn’t such a conundrum: consumer staples, energy companies, and healthcare firms know consumers need them no matter how high their prices are. That should help prop up their stocks going forward. But for others, it’s a lose-lose: consumer discretionaries, construction firms, and capital goods manufacturers (think machinery and vehicles) aren’t must-haves, and their stocks could take a pummeling because of it.

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