Thursday, June 21, 2012

Inflation is Definitely Under Control -- And Is Actually Signaling Bad Things

The above chart shows all four major inflation measures on a year year over year basis: producer prices (raw, intermediate and final) and consumer price.  Think of this as a series: raw materials are converted into intermediate goods, which are then converted into final goods and sold.  CPI captures some of the final PPI.

Let's start with the red line, which is raw producer prices.  On the good side, we've seen prices for commodities drop over the last few months.  That means there is little inflationary pressure.  It also means traders are betting on slower economic growth.  The red line captures the swings we've seen in raw materials, especially over the last few months.  Now we're in negative YOY comparisons, which is not good from an economic perspective.

Also note that the gold line (intermediate goods) and green line (final goods) are now partially below the CPI line.  Again, from a consumer's perspective this is good because it means we're not under a threat of massive inflation.  But it also means a slowing economy.  Finally, the last time we say this alignment was before a recession -- definitely not a good development on the statistics front.