Concerns about a double dip have always been on the backburner, but rarely have pundits been so vocal with concerns regarding QE3, domestic unemployment, the housing market, and debt concerns out of Spain. Is the end near? Let’s not get carried away. In fact, last week the Bureau of Labor Statistics released July’s producer price index (PPI) number, which rose by 0.2% as compared to the 0.1% expected by analysts, while the consumer price index (CPI) rose 0.5%, more than double the expected 0.2% increase.
On an annual basis, inflation stands at 3.6% for the third consecutive month, above the 3.3% expected by analysts. Why do these numbers matter? Apart from the big picture impact of a higher CPI leading to higher interest rates (and thus a stronger dollar), we can also create a ratio of the CPI over PPI as a measure of incentive to produce.
Effectively, this ratio measures the percentage increase in the cost of raw materials that is passed on to consumers. A rising ratio is an incentive to produce as higher costs are passed on by a greater-than-proportional amount to consumers. A falling ratio is a disincentive to produce because producers are forced to pay more without being able to charge more in commensurate terms.
Now if the Chicken Little prognosticators were correct, the CPI/PPI ratio would have fallen in July. Instead, as illustrated in today’s issue of The Schork Report, the ratio rose for the second consecutive month to 1.1778, the highest point since February ’11. The upswing is especially remarkable considering that the ratio was falling for the ten months between August 2010 and May 2011. A rising ratio is especially encouraging considering its rise from 1.192 in July 2008 to 1.249 by May 2009 coincided with the end of the recession and the title of the ‘manufacturing led’ recovery.
On the breakdown, the outlook is ostensibly less cheery — urban consumer motor fuel saw its CPI rise by 4.62% while
Consider consumer confidence against the CPI of
There are two factors at work, the first is that higher
When your neighbors are out of jobs, spending too much at the pump to drive to work seems like a good problem to have.
Put simply, the latest CPI/PPI data paints the picture of an energy hungry economy, and if you are willing to look past the headlines, the market does not seem to disagree. In the daily recaps section of today’s issue of The Schork Report, we have drawn the front month spread for WTI, which has risen from a low print of -$4.45 on February to just -$0.15 as of writing. In fact, we tested backwardation yesterday with a high print of -$0.02 and a cross into positive territory seems likely should draws at the Cushing, OK hub persist.
If there is really no demand for crude oil, why are traders willing to pay a premium to ensure they are first in line for access?
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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.