PPI Surge Unlikely to Impact CPI
- By Dominique Dwor-Frecaut
- 2 min read
The recent pick up in PPI inflation has prompted warnings that CPI inflation is about to accelerate (Chart 1). In reality, the correlation between PPI and CPI is spurious and reflects that, for both indices, energy prices are the greatest source of volatility. Strip PPI and CPI of their energy components and the correlation is much weaker.
The PPI/CPI overlap is strongest in the goods category of consumer spending. Since the late 1990s, however, core consumer goods PPI prices have consistently increased by more than core goods CPI prices. This suggests falling manufacturing profit margins, yet manufacturing profits as a share of manufacturing GDP have been increasing. I believe this apparent paradox reflects workers’ weak bargaining power.
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