For all those who looked at today's Priced Paid component of the ISM, and had a very bad feeling about what this signifies for not only corporate margins (one word: shrinkage), but broader inflation, we good news for you: you are absolutely right. A simple regression analysis of Prices Paid to CPI data indicates that the median CPI 12 months following a PP greater than 80 (such as this morning's 81.2) is over 6%! Which of course means that the far more volatile non-core components of the CPI will likely be surging at double digit rates by then. In other words, in one year, based on a simple historical regression, the US will well be on its way to inflation that will even leave the Chinese cowering in shame. And if consumers still refuse to leverage by then, then Al Jazeera will be covering riots (following the FTC's shut down of all US media) from our own back yard. If they do, on the other hand, and with $2 trillion in excess reserves, say hello to the Shazam moment.
John Lohman provides some humorous commentary on this otherwise very sad topic.
I sure am glad Bernanke has that whole “100%” thingy going because otherwise this morning’s ISM report would raise inflation concerns. The table below compares the ISM’s Prices Paid Index with subsequent changes in the Consumer Price Index since 1950. I realize that prior points in history may not have had the same levels of excess capacity and slack in the labor market that we currently have…but I’m 100% confident they didn’t have $2.5 trillion floating around either.
But not to worry. Should inflation actually rise 6.2% over the next 12 months, the San Francisco Fed will exonerate Bernanke with a research paper attributing the entire rise in the CPI to snow.