Why this obscure inflation gauge has US stock markets soaring

Investors will take good news from any source.

rising share price represented by a graph, red arrow and notes of American money

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The stock market is posting solid gains on Tuesday, with those portions of the market that got hit the hardest seeing some of the biggest gains in response. The Nasdaq Composite (NASDAQINDEX: ^IXIC) gained more than 2% near midday, while gains of closer to 1% for the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) showed broad-based support.

The catalyst for Tuesday's rise was a report that signaled that inflationary pressures just might be subsiding. Most of the time, investors don't pay a lot of attention to the Producer Price Index (PPI) report, favoring its consumer-oriented counterpart instead. However, because the PPI offers a different look at pricing pressures, it's particularly useful as market participants try to anticipate whether and when inflation might finally come under control.  

What is the Producer Price Index?

Most people are familiar with the Consumer Price Index because it matches their own experience as consumers. However, the Producer Price Index looks at the wholesale prices that companies pay for the inputs they need to provide the goods they make and the services they offer.

The PPI report actually includes several different measures of inflation. Final demand figures look at the prices that manufacturers charge retailers for finished goods that are ready for consumer purchase. Intermediate demand measures, however, look at input costs further down the supply chain, with four separate stages reflecting different points in the production process. Taken together, the PPI numbers offer a sense of where in the pipeline cost pressures might be strongest and where they might be easing.

October's PPI figures showed prices for final demand goods and services rose 0.2% for the month. That brought the year-over-year gain in the index to 8%. Breaking down the numbers, goods saw a 0.6% rise, but services prices were actually down 0.1% from the previous month. Most of the rise in goods came from a 2.7% jump in energy prices. Declines in service prices came from lower trade, transportation, and warehousing costs. Removing food, energy, and trade costs, the final demand PPI was 5.4% higher than it was 12 months ago.

The biggest cooling, though, was in intermediate figures. Processed goods for intermediate demand saw prices drop 0.2% from the previous month, while unprocessed goods plunged 11.7%. Energy was the primary driver on the unprocessed goods side, but for both measures, year-over-year gains slowed to about 10% -- down from growth rates of 25% to 50% or more at times in the past 12 months.

Working through the system

When companies price their goods, they tend to use the cost structure that was in place when they were purchasing required inputs to make those goods. As a result, it can take time for lower costs at an earlier stage of production to filter through and remove cost pressures on finished goods.

However, investors are increasingly optimistic that the conditions are ripe for future price increases to slow. Indeed, if outright price declines become more prevalent early in the manufacturing process, then it could lead to a relatively quick slowing of year-over-year price increases at the consumer level. That in turn could take away some of the urgency at the Federal Reserve to boost short-term interest rates at the breakneck pace they've followed over the past six months.

Many market participants have seen the pullback in stocks, particularly in high-growth companies with most of their profit potential far in the future, as driven in large part by the interest rate environment. If inflation does indeed prove fleeting after all, then it could lead to at least some recovery from the bear market over time. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A young entrepreneur boy catching money at his desk, indicating growth in the ASX share price or dividends
International Stock News

Why this high-flying investor is selling Tesla shares and buying this US tech stock instead

Ark Invest funds have been selling the electric vehicle maker's stock over the last few weeks and reinvesting the proceeds…

Read more »

two computer geeks sit across from each other with their laptop computers touching as they look confused and confounded by what they are seeing on their screens.
International Stock News

Is Nvidia stock heading to $175?

The bulls are lining up ahead of Nvidia's earnings report next week.

Read more »

A woman holds a bitcoin token in her hand as she smiles at the camera in the background.
International Stock News

Bitcoin keeps soaring. Could it hit $95,000 this week?

Could the current crypto rally have enough juice to push the coin above that once-inconceivable level?

Read more »

A boy in a green shirt holds up his hands in front of a screen full of question marks.
International Stock News

2 reasons to buy Nvidia shares before November 20 (and 1 reason to wait)

This top AI stock has soared nearly 200% this year!

Read more »

A group of friends push their van up the road on an Australian road.
International Stock News

Why Tesla stock just pulled back

Tesla finally hit a speed bump after a blistering post-election rally.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
International Stock News

Why Tesla stock keeps going up

Tesla stock costs more than $1 trillion now. Is that too expensive?

Read more »

A businessman in soft-focus holds two fingers in the air in the foreground of the shot as he stands smiling in the background against a clear sky.
International Stock News

2 Numbers I'll be looking for on November 20 when Nvidia reports earnings

While many analysts and investors will be looking at revenue and profit growth, two other figures are more important to…

Read more »

A man wearing a blue jumper and a hat looks at his laptop with a distressed and fearful look on his face.
International Stock News

Magnificent Seven: Unstoppable tech stock giants or risky buys?

Did you know the "Magnificent Seven" moniker was meant as a warning, not an endorsement? Check out the risks and…

Read more »