Schork Oil Outlook: Inflation Data Is Bad News
PPI/CPI Review: Bad News, Everyone!
Last week, the Bureau of Labor Statistics released the latest Consumer Price Index (CPI) and Producer Price Index (PPI) data. We were concerned about the changes as the PPI rose by 0.8% as compared to the 0.6% expected by analysts and CPI rose by 0.4%, in line with analyst expectations.
When the PPI increases by more than the CPI, it means producers are absorbing the higher costs of raw materials rather than passing them on to consumers. This was the case for much of the 2000’s as the benefits of outsourcing and efficient technology meant producers could absorb higher costs but still profit… up to a point.
When the commodity bubble popped, the CPI/PPI ratio began rising again, fueling growth. This was likely the reason why our latest recovery is considered by many to be ‘manufacturing-led.’
As illustrated in today’s issue of The Schork Report, the CPI/PPI ratio rose from 1.193 in July 2008 to 1.254 in March 2009, a two year high. Unfortunately, we are beginning to question the validity of the manufacturing-led recovery — the CPI/PPI ratio dropped for seventeen of the next 25 reports, and now stands at just 1.173, its lowest point since January 1994.
Unsurprisingly, the PPI of gasoline as fuel oil was a large part of the increase, jumping 8.86% in April after a 14.17% increase in March. This marks a 24.29% increase over the past two months, the largest since June 2009. However, we would expect higher prices leading up to June due to summer grade gasoline and driving trend, but it is irregular for this time of year — last April saw a 13.17% two month increase and the historical average comes to just 12.88%.
When the cost of transporting your product goes up by more than the price of the product, you have to question whether that’s a route worth servicing, a driver worth hiring, a warehouse worth keeping open. This may seem extreme but consider the bevvy of costs being borne by producers: the PPI of foodstuffs and feedstuffs jumped 4.03% in April while the PPI for rubber products (whose polymers depend on crude hydrocarbons) rose by 2.97%.
Higher raw material costs, and increased loan requirements should make for a risky operating environment for businesses. This is likely why, despite a strong earning session, initial jobless claims remain high and the unemployment rate stands at 9.0%.
Speaking of which, the picture for consumers is even less encouraging. In today’s Report, we draw total CPI against core CPI, which is less food and energy. Historically, core CPI has been above total CPI, but starting in March, core CPI has seen a shortfall compared to the total. The last time this happened was between May 2008 and October 2008, during the great recession. Before that, it crossed over between April and June 1983, and before that March 1979 to January 1983, matching the double dip recession of the early 80’s. We also saw a deficit between February 1974 and May 1974, in line with the 1973-75 recession.
We have had recessions (such as the dot-com bubble) which did not depend on a shortfall between core and total CPI. But we have never seen a shortfall without a recession before or after.
The implication is that when core falls below the total, commodity prices have increased faster than the consumer’s ability to keep up. In turn, inflation without commensurate growth is one of the major causes of recessions.
Pundits could argue that we have also never seen such fuel efficient cars, or wholesale savings from firms such as Walmart and Apple, or the still unknown effects of burgeoning economies like China and India.
Frankly, we are pessimistic, and the latest CPI/PPI data tells us that commodities, and specifically energy commodities, were simply too damn expensive in April for producers and consumers alike.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.