Yesterday, we wrote about the Produce Price Index and the fact that it was showing cost increases leaking into the Producers bottom lines. The obvious concern here is that higher costs going into the production begins to erode profit margins if those higher costs can not be passed on to consumers.
Today, we see that the Consumer Price Index (CPI) showed a fairly substantial increase in the headline inflation number, however, after stripping out food and energy, core inflation still remains fairly subdued. From the release:
“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.“
So, CPI increased 0.4% and the is the third increase of that size in the last four months. That is 4.9% annualized at this point and the biggest pushes in pricing have been new vehicles, used cars and trucks, medical care and shelter. Food and Energy are still pushing and are above their targets on a 12-month basis as well.
At the moment it appears that some of the costs of inputs at the producer level are being passed onto the consumer. However, as you see in the chart of our producer/consumer composite price index (PCCI) of we are now at levels that historically have begun to spell trouble for the overall economy. With economic growth already running at a very tepid 1.8% it is highly likely that we will see Q2 GDP come in weaker than expected. We have already seen the recent scrambling by WallStreet to lower GDP expectations this year from 4.0% to 3.0% and it is very likely that we may see real economic growth by the end of the year, absent QE3, closer to 2%.
However, reality is that this all builds a stronger case for QE3 by the end of summer especially as the current administration is gearing up for 2012 elections.