Today after a good meal, I accidentally fell asleep and woke up only now, missing the PPI data. However, generally speaking, the market's reaction to the PPI is not very strong. From the data, the broad PPI data is not good, indicating that the year-on-year rate of production costs is increasing. Although the month-on-month rate is the same as the previous value, it is higher than expected, which is also not a good thing.

Only the core PPI data is somewhat acceptable, with the year-on-year rate lower than expected but equal to the previous value, and the month-on-month rate lower than both expected and previous values. However, the core month-on-month rate removes food and energy. Overall, gasoline, diesel, aviation fuel, industrial chemicals, plastic resins, and transportation costs are all rising, which shows that upstream costs are beginning to seep into the industrial chain.

Looking solely at the CPI, the market could originally breathe a slight sigh of relief. The May CPI is up 0.5% month-on-month and 4.2% year-on-year, indeed higher than the previous value. But the core CPI is only up 0.2% month-on-month and 2.9% year-on-year, indicating that core inflation on the consumer side is not yet completely out of control. A significant part of the CPI this time is also driven by energy.

If the energy issue can indeed suppress inflation, when looking at the CPI and PPI together, it can be found that consumer-side inflation is temporarily manageable, but production-side inflation has become evident.

PPI represents the cost side, while CPI represents the consumption side. A stronger PPI compared to CPI indicates that companies are facing higher purchasing, transportation, energy, and production costs.

What follows is likely to be two types of trends:

The first type is that companies pass on costs to consumers, leading to potential continued increases in CPI and PCE.

The second type is that companies are reluctant to raise prices, resulting in compressed profit margins, which is detrimental to corporate profitability.

Therefore, no matter how the PPI data is viewed, it is not considered good data, especially not friendly towards the Federal Reserve's interest rate cuts.

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