by Lance Roberts, Clarity Financial
With the latest reports on prices, the inflation surge has become overwhelmingly visible. However, as discussed previously, the question we must answer is whether it will last?
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This past week, we saw both the CPI and PPI reports come in both now above their long-term trends. However, it is the annual rate of change with which we are most concerned. As shown below, the current spread between PPI and CPI hit another record.
Please pay attention to this spread as it shows producers cannot pass along inflation to their customers. Therefore, the retained inflation, and by this measure, a lot of it, will erode profit margins and earnings in the future.
Import and export prices also show a strong surge relative to GDP growth. While increased export prices are good for exporters (~40% of corporate profits,) increased import costs impede consumption and domestic production. As such, it is not uncommon to see weaker economic growth following such episodes.
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It is also worth noting that “wages” for the bottom 80% of workers continue to weaken despite the “strong” recovery. Such will make it very difficult for consumers to absorb higher costs and continue to consume at current levels.
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