The two charts below offer clues for evaluating the risk of profit margin squeeze in the current economy. One is the ratio of crude to finished goods in the Producer Price Index. The other is an indicator constructed from two data series in the Philadelphia Fed's Business Outlook Survey through today's release. It is the spread between the Philly Fed's prices paid (input costs) and received (prices charged) data.
A major risk factor for margin squeeze has been the increase in commodity prices over the past several months with the price of oil and gasoline as the dominant factor. Commodity prices have moderated, but the squeeze remains in evidence.
So let's take a broader view of these two indicators by viewing them within the context of inflation as measured by the Consumer Price Index. As the first chart clearly shows, the all-time high in the PPI crude-to-finished-goods ratio was in July 2008, the same month that crude oil and gasoline prices in the U.S. hit their all-time highs. The previous ratio high was in the summer of 1973, a few months before the outbreak of the October Arab-Israeli War and the Oil Embargo. Inflation had already been rising in a series of waves since the mid-1960s. But Middle-East events of 1973 were the primary trigger for the nearly ten years of stagflation that followed.
The November 2011 ratio is at the 98th percentile of the 777 data points in this series. November a year ago was at the 92nd percentile. The interim high since the 2008 peak was the 99th percentile in April.
(Click charts to expand)
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