Inflation is shifting to unfavorable for stocks
Key points:
- The stock market hates uncertainty, and few things cause more uncertainty than rising inflation
- Both the Producer Price Index and Consumer Price Index are now outside of their "normal inflation" range
- While inflation is only one factor that affects stock prices, this is an unfavorable development for stock investors
The current state of the Producer Price Index
The Producer Price Index (PPI) is a measure from the Bureau of Labor Statistics (BLS) that tracks the average change over time in selling prices received by domestic producers for their output. It acts as a key indicator of wholesale inflation.
Note that the PPI data is typically updated mid-month. However, for testing purposes, all analysis below assumes we update only at the end of each month.
The real question regarding PPI is the annual rate of change, i.e., how quickly prices are rising or falling. We look at the 12-month percentage rate of change as a measure of wholesale inflation. The chart below shows the 12-month % change for PPI since 1914. The horizontal lines represent the +9% and -12% cutoffs.
- Readings between +9% and -12% are considered "normal" PPI inflation
- Readings of +9% or higher are considered "too much PPI inflation"
- Readings of -12% or lower are considered "too much PPI de