CPI vs PPI Divergence Signal

Signal Summary:

• Configuration statement: Given a divergence_z of 0.23, a CPI_YoY of 2.43%, and a PPI_YoY of 3.22%, this setup aligns with range-biased price paths and normal volatility, where the dominant risk is mean reversion because the abs(z) < 0.35 threshold indicates a Neutral regime, not a trend continuation.
• The signal is currently classified as NEUTRAL, indicating the producer-to-consumer price gap is within historical noise thresholds (1).
• Conviction Band: Medium; Interpretation Confidence: High Confidence; Internal Conflict Flag: No. Signal Stability Assessment: Stable; Threshold Proximity: Near; Revision Sensitivity: High.

Methodology Applied:

• Divergence thresholds: abs(z) < 0.35 is defined as NEUTRAL, representing a stable price relationship (2).
• HOT regime requires z >= 1.0 or (z >= 0.75 and CPI YoY >= 3.0%) to signal cost-push pressure (1).
• The methodology treats producer prices as a leading indicator for consumer price direction (1).
• CPI vs PPI Divergence Signal: latest observation February 28, 2026 (1).

Key Dynamics:

• The primary driver is the narrowing gap between PPI and CPI, with the PPI_minus_CPI_YoY spread currently at 0.78 (1).
• Recent momentum shows a shift from negative to positive divergence, though it remains below the 1.0 z-score threshold for a regime shift (1).
• Stabilisation in the NEUTRAL band has persisted for over 28 months (1).
• Conditional Invalidation: Divergence z-score exceeding 1.0 or falling below -1.0.

Scenario Balance:

• Base case dominant; risks balanced due to stable price relationship.
• Upside risk: PPI acceleration beyond CPI causing margin compression and a transition to HOT.
• Downside risk: PPI collapse relative to CPI leading to a return to the COOL (disinflation) regime.

Time Horizon & Aggregation:

• Time Horizon: Cyclical (months) as it identifies multi-month pipeline inflation trends.
• Aggregation Weight Hint: Medium as the signal currently lacks extreme directional bias but identifies core stability.

Macro Relevance:

• Informs the pricing and inflation dimension by measuring relative speeds of production and retail price changes (1).
• The implied economic mechanism is pipeline price pass-through; current neutrality suggests no significant upstream pressure on retail margins.
• Cycle position: Not determined by methodology.
• Typically interacts with inflation breakevens and ISM Prices Paid to confirm cost-push environments (1).

Regime Context:

• Persistent Neutral regime since October 2023 (1).
• Direction of change: Stabilising, with a slight strengthening of the producer price component relative to consumer prices.

Model Limitations:

• PPI is subject to multi-month revisions which can retroactively change z-score classifications (1).
• Pass-through from producer to consumer prices is often lagged and incomplete (1).

Data & References:

• Latest dataset observation: 2026-02-28 (1).
• Dominant datapoints: divergence_z (0.23) and PPI_YoY (3.22) (1).
• Additional indicators: ISM Prices Paid and Inflation Breakevens would improve reliability.