The Changing Dynamics Underlying Profit Margins

In past posts I have written of the challenges businesses face in pricing, given today’s economic environment.  One aspect that I mentioned in the December 16 post was how PPI (Producer Price Index) growth was significantly outpacing that of CPI.

Since that December 16 post, the PPI-CPI growth rate issue has been exacerbated.  Doug Short, on his blog, over the recent past has posted a few interesting charts illustrating this concept from a long-term historical viewpoint.

Below is a chart from his February 21 post, titled “Profit Margin Squeeze and Inflation Risk.” It shows data from the Philadelphia Federal Reserve regarding Prices Paid vs. Prices Received, with Inflation (CPI) and Recession periods shown:

(click on chart to enlarge image)

I believe that what this chart depicts is notable in a variety of ways.  As shown, we are experiencing a unique situation on a variety of fronts, and are already at historical peaks in both the index levels and 12-month MA as shown.

I believe this data and its implications for businesses and the economy at large is of great concern, and as such monitoring such deserves rapt attention.  This is especially so given the vulnerability of the U.S. Dollar to a substantial decline, a topic that I have written extensively about.

A Special Note concerning our economic situation is found here

SPX at 1315.44 as this post is written