CPI Surge Outpaces PPI = Earnings Profits?
Communications in the most abstract form.
I admit. I have a difficult time writing this post.
This is because it’s about looking at available inflation data quickly and making an “educated” high-level guess whether companies overall, will be reporting profits during quarterly earnings season.
Below is my maiden attempt. Stay the course, with me? Hee hee.
Inflation Definition.
By definition:
CPI - measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
PPI - measures the average change over time in the selling prices received by domestic producers for their output.
Inflation Reports.
US Consumer Price Index (CPI) report for March 2024, was released on Wed, 10 Apr 2024.
Headline CPI: was 3.5% vs 3.4% expected vs 3.2% (February).
Core CPI: was 3.8% vs 3.7% expectations vs 3.8% (February).
A day later, US Producer Price Index (PPI) report also for March 2024, was released on Thu, 11 Apr 2024.
Headline PPI: was 2.1% vs 2.2% expected vs 1.6% (February).
Core PPI: was 2.4% vs 2.3% expected vs 2.1% (February).
Do You Agree?
At a glance, it looks like the difference between CPI and PPI will be the “profits” to be had, right?
Data Analysis.
Diving further, let’s comparing the 2 inflation data set:
Both headline inflations came in higher than previous month data, where CPI rose by +0.3% and PPI by +0.5%.
For core inflations, CPI remained the same as previous month, while PPI rose by +0.3%.
Regarding selling prices, it is safe to assume that CPI’s will “always” be greater than PPI’s.
Afterall, everyone goes into business to hopefully make a profit - right!; with the following question of “to what extent”?
Conclusion:
Taking all the above into considerations, is it safe to infer that most companies should be reporting profits during this Q1 2024 earnings season?
For starters, let’s look at US banks quarterly earnings just announced on Fri, 13 Apr 2024:
All 3 US banks $JPMorgan Chase(JPM)$ , $Wells Fargo(WFC)$ and $Citigroup(C)$ handed in a good set of results on Friday.
So far, seems like the hypothesis “works”.
This is only the tip of the iceberg.
As the week progresses and more companies report their earnings — the growing sampling will ascertain if the “simplistic” approach is helpful.
Reality Check.
Realistically, corporate earnings reporting is definitely more complex than taking two inflation figures and try to mesh them together to make sense of profitabilities for all listed companies in the US market.
For a start, a higher-than-expected CPI suggests that consumers are paying more for goods & services, that could be:
Indicative of increased consumer spending.
Inflationary pressures etc…
Similarly, a PPI that is lower than estimates but higher than previous data might suggest:
Production costs are rising.
Albeit at a slower pace than consumer prices. Nonetheless, it is still bubbling upwards.
Other Factors:
Factors needed for a definitive conclusion about a company’s quarterly profits in Q1 2024 include the followings. (see below)
Sales Volume: How many units of product or service did the company sell? Higher sales volume, even at a flat price, can lead to increased profits.
Operating Expenses: These are ongoing costs of running the business, like rent, salaries, marketing, and administrative costs. Increased expenses can eat into profits even with higher prices.
Inventory Levels: If a company has a lot of unsold inventory, it can tie up cash and lead to write-downs if the price needs to be reduced to sell it.
Taxes: Changes in tax rates or regulations can affect profits.
Debt Levels: Companies with high debt may have larger interest payments, reducing profits.
Industry Specific Factors: Different industries have unique dynamics. For instance, a company in a highly competitive industry might have less ability to raise prices without impacting sales volume.
One-Time Events: Unexpected events like lawsuits, natural disasters, and even regulations changes can have a significant impact on profits.
By considering all these factors, along with the CPI and PPI data, everyone will get a clearer picture of a company's financial health and potential profitability.
I like to think that all these are more or less valid during “peace” time.
During exception times (eg. on set of Covid), these factors matter less as market sentiments & concerns will overshadow these company-related fundamentals.
The heightened tension in the Middle East has spilled over to spawn a clash initiated by Iran over Israel. (see above)
Will this “enlarge” conflict in the Middle East affect US market sentiments when trading resumes on Mon, 15 Apr 2024?
So much so that quarterly earnings take a backseat ?
Exit Plan.
Do you have an exit plan in placed should market sentiments dip further?
Do you prefer to adopt a “sit & wait” or even “buy the dip” strategy?
Cannot emphasize how equally important an Exit strategy is to an Entry strategy.
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This is actually very hard to get the conclusion
Tomorrow will be a green day from the open I believe!!
Look for it. Njoy!
Great article, would you like to share it?
Nice