The Philly Fed Index came out today, and it was red hot.But of course, every silver lining has a cloud, and not surprisingly, people are honing in on the fact that the “prices paid” component surged 13 points. Companies are paying more for their goods.
Two points on this, though.
The first is that you know this already. We know commodity prices are going up, and we’ve known it for months. This isn’t news anymore. Every random ISM/regional fed survey we’ve seen shows this.
But here’s the other point, and it has to do with the nature of what is a “diffusion index.”
A surge in the prices paid index doesn’t mean that actual component prices surged. It means the number of companies who saw an increase in commodity prices grew rapidly compared to the number of companies that didn’t see an increase.
So for this month, 67.2% of companies saw an increase in prices, 32.8% saw no change, and 0% saw a decrease. Again, this tells you NOTHING about the size of the hike.
As ZeroHedge notes, the prices paid component vs. prices received component is at the worst level since 1979. That’s not good for businesses, but that really doesn’t tell you anything about how badly margins were hit. It certainly doesn’t mean — as some might thoughtlessly guess — that margins have hit their worst level since 1979. If 100% of companies saw a 0.1% prices paid increase, and 100% of companies saw decrease of 0.1% in prices received, that’d register a horrible number, but the ultimate margin wouldn’t be that big.
Look, we know there’s something of a squeeze on margins thanks to commodity prices. Core PPI jumped 0.5% yesterday, while core CPI was only up 0.2% today. Not ideal, but not some epic multi-decade squeeze either.
Business Insider Emails & Alerts
Site highlights each day to your inbox.