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Inflation mechanics

How does inflation work? There are three levels of prices that affect the Consumer Price Index, particularly when it comes to Goods: the first level is the commodities or raw material prices. If demand is higher than supply, basic material prices go up and that “transfers”’into the next level, which is the Producer Price Index (PPI) where manufacturers take the raw materials and convert them into “stuff” that the public can buy, adding a margin in the process. Finally, transportation, excess demand, and retailers add their own margin to the mix, and that gets reflected on the CPI. How are we doing on each of the steps so far this year? The commodities index is up 6-7% YTD; PPI was published yesterday and it went up 1.6% YOY, higher than expected, and CPI is running hotter than desired at 3ish%. Bonds are starting to discount the posibility of no rate cuts this year.


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