The Federal Reserve has maintained a 2% inflation target for several years. It is the level that allows the U.S. economy to stay on a healthy economic path, according to the Fed. However, the economy has struggled to meet the target rate in recent years, often settling below 2%. Some Fed economists believe a slightly lower rate marks good economic conditions, and the target may need to be adjusted.
Regardless of where inflation sits, it is important to understand the pressures it is facing, says Jack Bouroudjian. There are two critical reports for gauging this pressure: the producer price index (PPI) and the consumer price index (CPI).
Both the CPI and the PPI measure the change in prices for goods and services. Together, they give investors a complete view on inflation, operating margins and pricing power.
The spread between the two indexes gives investors a read on the ability of manufacturers to pass along price pressure, referred to as pricing power.
In early 2020, we remain in a period of disinflationary pressure, says Jack. “In this environment, an expanding spread can also suggest downward pressure on prices for raw materials. This is problematic for central banks who are trying to reach a 2% inflation target.”
Watch this week’s OpenMarkets Weekly above for more on how CPI and PPI give the market a read on where inflation is headed.