• Jonathan V. Bever

One-page: One-Piece of the Puzzle

While today’s headline CPI number is painfully high at 9.1%*. We want to point out this is a lagging indicator.

“The Consumer Price Index (CPI), which measures changes in the inflation rate, is another closely watched lagging indicator. Few events cause more economic ripple effects than price increases. Both the overall number and prices in key industries like fuel or medical costs are of interest.” Investopedia

Let us look at one of the pieces of data which we monitor, as it is an indicator of the future trend.

“The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories. Each factor is seasonally adjusted. The ISM Report on Business contains three separate purchasing managers indexes based on surveys.” Investopedia

“The ISM PMI index is considered to be a leading indicator. It helps foretell future spending and expenditures that contribute to economic expansion. The indicator tends to reflect changes before the economy does.” Forex Training Group

So, let’s look at the ISM Manufacturing Report on New Orders and the ISM Manufacturing Report on Inventories.

Please see the chart below, which is the ISM Manufacturing Report on New Orders (green line), and the ISM Manufacturing Report on Inventories (orange line). The new orders (the green line) have gone down, and (the orange -line) inventories have gone up. Inventories are building while new orders are going down, does this sound like an inflationary scenario or deflationary scenario? Well, it is not inflationary! A classic inflation example is, “too much money chasing too few goods”. What we are seeing here portends deflation.

Let us look at the bottom graph, which simply shows New Orders minus Inventory. On the bottom graph, the ratio is shown as either green which is a positive ratio, or red which is a negative ratio. You can see the red negative triangle. It is negative 6.80 or (-6.80). The last time we saw red was at the beginning of the pandemic in 2020. The time before that was back in 2012; more on this in our next One-page: Once-piece of the Puzzle. If the negative trend continues, no doubt we will have deflation.

Chart data source Bloomberg. Created by Jonathan V. Bever


*all items index before seasonal adjustment ended June 2022, U.S. Bureau of Labor Statistics. https://www.bls.gov/news.release/cpi.nr0.htm

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