PPI of chemicals and metals are likely driving CPI

In the previous post, we showed that the CPI has been following the PPI since 2000 with a reduction factor of 4.4 and a constant of .067, i.e. that the CPI/PPI regression shows that if to multiply the change in CPI by 4.4 and subtract 0.067 one obtains the PPI with the coefficient of determination of Rsq=0.83. 

The PPI (of commodities) has many components and we have chosen Chemicals (06) and Metals (10) as most relevant to the dramatic changes in the commodities supply. Fuels were also analyzed in the previous post. Figure 1 compares the inflation rate (m/m on a yearly basis) of the PPI and Chemicals. One can see that the overall PPI practically coincides with the Chemicals PPI over the whole period after 2000. Chemicals have a weak reaction to the economic slack in 2020 and extraordinary reaction to the changes in natural gas and other energy sources in 2021. The rate of PPI inflation reaches 24% as well as the rate of Chemicals PPI inflation. A small drop at the end of 2021 might be a trend or tern to the growth depending on political and economic events.

Figure 1. PPI and Chemicals PPI inflation rate after 2000

The PPI of metals is more sensitive to economic and political forces. Figure 2 shows that the inflation rate if the PPI of metals is approximately 2 times higher than that of the overall (commodities)  PPI. Figure 3 illustrates the fit between the curves when the PPI of metals is divided by 2. The resulting fit is the same as in Figure 1.  

With the increasing price of natural gas and electricity, the PPI of metals will likely suppress metal production of all kinds. The PPI inflation will grow and then lead to the CPI growth at an accelerated rate. All these factors will likely result in a deep recession.

Figure 2. PPI and Metals PPI inflation rate after 2000

Figure 3. PPI and corrected Metals PPI inflation rate after 2000