PPI: Industrial Commodities vs. CPI

The following chart shows the producer price index for industrial commodities divided by the consumer price index.


Click to enlarge.

If you are a believer in return to trend line and/or return to median theories then you have a tough decision to make. Which line will we be returning to?

On the one hand, our monetary policy would support returning to the blue trend line. On the other hand, I'm not a believer in China's economic miracle story (nor have I been). Returning to the red trend line is therefore hardly out of the question. There's not just a glut of dollars; there's also a glut of stuff.

Perhaps there is a balance that is between the two lines. In fact, that is where we find ourselves today.

Let me zoom in a bit and add some new exponential growth trend lines.


Click to enlarge.

We were on a highly correlated exponential trend in blue but then it failed (rather spectacularly). Now we're on a less correlated exponential trend line in red. When will it fail? Has it already failed and we're just waiting for more confirmation? All exponential trends eventually fail. The timing can be incredibly difficult to predict though. It won't do us any good to bet against it if it fails long after we're dead and buried.

As seen in the chart, the trend over the past year has actually been down, much to the dismay of the hyperinflationists. I, for one, am not complaining.

Source Data:
St. Louis Fed: Custom Chart