Inflation measures and company margins; follow the CPI-PPI difference

 

A quick way to assess the direction of company margins is to compare CPI against PPI rates. The CPI represents output prices while the PPI reflects input prices. When the CPI - PPI is positive margins should be increasing while if CPI-PPI is negative input prices are rising faster and margins should be falling. Currently, there is a strong negative bias which suggests that margins should be compressed or falling. 

This difference also tells us something about sector differences. Mining, materials, and energy companies should be doing better than the market when the CPI-PPI difference is negative. While the relationship against the market overall is weak, the relationship strengthens when there are large deviations or extremes. The cross-sectional relationships are stronger.