PPI vs CPI

Inflation has become one of the most misunderstood topics in America. Most people hear “inflation is hot” and immediately assume consumers are about to get crushed. But the relationship between inflation, businesses, and consumers is much more nuanced than the headlines make it seem.

Yesterday’s Producer Price Index (PPI) report came in hotter than expected, reigniting concerns that inflationary pressures may still be lingering beneath the surface of the economy. The PPI measures inflation at the wholesale level — essentially what businesses are paying for goods, materials, transportation, and production costs before products ever reach consumers.

The Consumer Price Index (CPI), on the other hand, measures the prices consumers actually pay at the checkout line. Think of PPI as inflation upstream and CPI as inflation downstream.

Historically, when PPI rises sharply, businesses often pass those higher costs directly to consumers, leading to higher CPI readings later on. But this economic cycle may be different for one major reason: corporate profits are still hovering near historically elevated levels, around 14%.

That matters.

For years following the pandemic, many companies experienced extraordinary profit expansion. Some businesses raised prices because their costs increased, but many also expanded margins simply because consumers were willing — or forced — to pay more. In other words, not all inflation was purely cost-driven. Some of it became profit-driven.

Today, many corporations still have unusually healthy margins compared to long-term historical averages. That creates an important buffer.

If inflationary pressures from the latest PPI report prove temporary rather than structural, companies may choose to absorb some of those higher costs instead of immediately passing them on to consumers. Why? Because maintaining market share and consumer demand becomes critically important in a slowing economy.

A business earning a 14% profit margin has far more flexibility than one earning 5%.

This is where financial planning and investing become important. Investors often panic at any sign of inflation, assuming it automatically means the Federal Reserve will tighten policy aggressively and the consumer will suffer. But markets also understand that corporations are adaptive. Businesses can cut expenses, improve efficiencies, absorb short-term cost pressures, or strategically reduce margins temporarily to protect long-term growth.

Consumers are also becoming more price sensitive after several years of elevated inflation. Companies know there’s a limit to how much additional cost consumers can tolerate before spending behavior changes dramatically.

That creates a balancing act:

• If inflation pressures are short-lived, businesses may absorb them.

• If inflation becomes persistent again, companies will likely pass costs back onto consumers.

• If consumers weaken too much, corporate earnings could eventually compress.

This is why investors should avoid reacting emotionally to a single inflation report. One hot PPI number does not automatically mean runaway inflation is returning. The bigger question is whether inflation becomes embedded and sustained over time.

For financial planning purposes, this environment reinforces why diversification matters. Inflation impacts every asset class differently. Stocks can often adjust over time because businesses adapt, raise prices, or innovate. Bonds may struggle during inflationary spikes. Cash loses purchasing power slowly over time. Real assets and quality businesses tend to perform better in inflationary environments.

The key takeaway is this: inflation doesn’t just impact consumers. It also impacts corporate profit margins. And right now, corporations still have enough profitability to potentially absorb some short-term pressure without immediately forcing consumers to bear the full burden.

That’s an important distinction many headlines miss.

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Colin Symons, CIO Lloyd Financial Group

PPI blew past expectations, at 1.4% m/m vs. exp. 0.5%. That has the Y/Y number at 6%, the highest since 2022. Core PPI was 1% m/m vs. exp. 0.3%. On the bright side, oil prices seem to be stabilizing but that can trickle into other components.

The Senate confirmed Warsh for Fed chair in a 54-45 vote. He should start at the end of the week.

The 30Y T auction saw the first 5% coupon since 2007.

Cisco (CSCO) is up 19% on strong AI infrastructure demand.

Honda (HMC) reported a first-ever annual loss on EV charges but was up 3% on an expected return to profit.

Jobless Claims, Retail Sales, and Export/Import prices, today.

Bottom line: Oil and rates are both down a little as investors seem to be awaiting news.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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