April 12, 2022
Our call for a better-than-feared March CPI was based on extreme expectations and leading indicators pointing to an imminent near-term peak. CPI is just one inflation measure that happens to lag others. The most reliable market based indicator is the ISM new order to inventory spread. The post-Covid order book has been exceptional since May ’20, while supply bottlenecks (supply chain built for slower growth) contributed to lower inventories and the widest spread on record. Divergence between the two leads to higher prices, while convergence leads to lower prices. New orders and inventories began converging in February. Of course inventories don’t usually rise in a vacuum, and convergence can also come from falling new orders/lower aggregate demand. Producer prices (March PPI tomorrow) lead consumer prices (CPI) by a few months, and that ratio has also converged as of late.