Tuesday, May 16, 2006

The Wholesale Price Index

The importance of the Reading is the Year over Year increase of 4%. It is fashionable among Economists to concentrate on Core inflation, but Business does not pay the core prices, they pay the real prices. This cuts into Profit Margins, if the CPI does not also rise equally in advance. Another interesting element of the entire estimation is it ignores the Energy consumption of the Distribution sector. Shipping Costs are among the highest Energy consumers in both the greater Economy, and in the Production cycle. Added Energy Costs cuts into Profit Margins drastically through the Distribution sector.

The CPI is supposed to be reported tomorrow, and comparison should be made of the differance between the PPI and the CPI. Any disparity between the Two indexes in percentage term, means that Profit Margins have gained or lost, or that Distribution Costs are biting into Profit Margins by non-passage of Energy Costs to Consumers. One must remember that loss of Profit Margins affect Recapitalization Expense far more rapidly than it impacts Investment. Business will let Capitalization decay faster than it will alter overall Investment Schedule. This results in more inefficient future Production. lgl

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