One of the most controversial questions in economics right now is whether or not we're in for a high rate of inflation in the U.S. The Federal Reserve took unprecedented measures to provide monetary stimulus over the past couple of years. It says that it can reduce monetary supply effectively to avoid high inflation, but some critics remain unconvinced.
Those interested in this question likely pay some attention to the government reports that come out each month on inflation. There are two major metrics: the Consumer Price Index and the Producer Price Index. In theory, the two should be connected. If prices are rising for producers, eventually they'll have to pass that inflation on to consumers. If they don't, then eventually their costs will overtake their revenue.
That might trouble some market observers, because recently, we've seen producer prices rise more aggressively than consumer prices. For example, the 12-month change for PPI for finished goods in March was 5.8%. For CPI it was just 2.7%. This disconnect isn't new: for about the past year, PPI has been rising much faster than CPI. You can try to blame rising food and energy prices, but they're only part of the story. Here's a chart showing core CPI and core PPI for finished goods (the measures which exclude food and energy) since 2007 (click to enlarge):
There are a few things to note about this chart. Let's start at the right and move to the left. You can see the trend mentioned above pretty clearly -- producer prices have been increasing much more quickly than consumer prices for the past year. Does this mean that producers will be forced to raise consumer prices significantly in coming months?