Today the PPI (producers price index) posted an unexpected swing up. Should that apply some pressure to consumer prices (CPI)? Maybe yes, but not very likely.

What we see is that more and more retailers are reporting that they have to resort into dramatic price cuts in order to just keep consumers shopping. Circuit City just reported that they had cut prices so much that they had to lose money. Retailers will say “no” to any price increases.

Hence the producers of finished goods will have to swallow the costs and miss profit estimates. The cost-cutting efforts will lead to layoffs and production cuts. The inventory of unfinished goods will pressure the producers of those goods to scale down until it hits the commodities. I do expect the $50 oil sometimes next year.

This is how disinflation works.

Advertisements