Friday, December 18, 2009

More on PPI and CPI

The economy seems to be stabilizing, yet there is the uncertain look forward due to the massive societal changes being made in Congress. We look here are a few current statistics which may assist in determining where we may be going in the short term.

The first chart below is the combined PI and CPI data.

The PPI is now increasing at a more rapid rate than the CPI. The annualized rates are now back to 5.8% for both and the pre and post bust periods have appeared to have gone by. Both seem to be tracking back to the common trend lines. The problem is that both are at a 5.8% increase while the Fed holds interest rates at the all time lows. This is a dangerous trend.

Now we show the rates of change for both below:

The polynomial trend lines show the increasing rates again. The drops in the economy are clearly shown and the pull out is also obvious. The concern again is the rapid upswing of both indices.

The next is the productivity indices as shown below. They are at all time highs which means the workers are working at maximum and when they get "exhausted" and new hiring occurs then we can expect now money to flow, demand to build, CPI and PPI to grow more rapidly and then inflation to occur.

The following chart is the pay indices.

As we would expect they are dropping, even as productivity rises. The recession has put downward pressure on salaries and yet the costs are moving upward. This double direction causes a substantially greater effective inflation. With prices rising and compensation dropping and unemployment rising, there is an effective real current inflation rate well in excess of 7%. When the economy makes the turn in employment we expect to see this in the actual price index numbers as well.