As consumers we’re conditioned to look at one side of the equation when we go to buy things, what’s it gonna cost me. A couple percent increase in the cost of some staple items can cost a household hundreds or thousands of dollars more per year to live the same way. That cost is affected not only by prices, but by many other factors as products make their way to the consumers. That is called inflation and is commonly measured by the Consumer Price Index or CPI.
On the other side of the coin there is a metric called PPI or the Producer Price Index. This measure is meant to track what U.S. industries are paying directly for their raw materials that come from the U.S. and gauges how much more expensive it gets for companies to produce their product over time. Because PPI is directly linked to commodity pricing, it is looked at as an indication of inflationary pressure.
So CPI is looking at inflation from our perspective and PPI is looking at it from a producer’s perspective.
Over the past few days the May numbers were released for both of these metrics and both reflected 10 year highs. CPI had gone up 4.99% and PPI up 6.56%. This indicates increasing cost inflation to us, but also high inflationary pressure that could cause that to go on for a while.
Because of these numbers the Fed has moved up its inflation estimate for this year to 3.4% but still maintains that they don’t want to hike interest rates until 2023.
Fed policy has now become a national game of chicken. Is this inflation a bluff all caused by the pandemic that will quickly wind down? Or is the Fed misjudging the impact of the couple Trillion dollars it blasted into the economy over the past 18 months on top of the most accommodative rates in history?
Time will tell, but we know one thing for sure, investors sure are in a pickle in the meantime. We’ve got the highest inflation in a decade and lowest yields in a decade at the same time. The Fed has finally created inflation, but they won’t give investors a way to keep up with it. Now even your conservative investors need to be more careful than ever with where they put their money or the silent thief will pull their hard earned savings right out from under their noses.