CPI vs PPI Divergence Signal

Signal Summary:

• The CPI vs PPI Divergence signal (1) is currently in a NEUTRAL regime as of 2025-12-31.
• This indicates a transition from prolonged disinflationary pressures, with the gap between producer and consumer price inflation narrowing.
• Conviction Band: Medium, Interpretation Confidence: High Confidence, Internal Conflict Flag: No.

Key Dynamics:

• The `divergence_z` currently stands at 0.176015 (1), well within the neutral range.
• The PPI-CPI year-over-year gap has narrowed to -1.448803% (1), significantly recovering from prior deep negative values.
• The 3-month change in this divergence is strongly positive at 3.398253% (1), signaling upward momentum.
• Conditional Invalidation: A sustained acceleration in producer prices, causing `divergence_z` to exceed 0.75, particularly with CPI above 3.0% (1), would shift the signal to HOT.

Scenario Balance:

• Base Case dominant: The NEUTRAL regime persists as the PPI-CPI divergence remains within its current bounds, suggesting balanced inflationary pressures.
• Upside secondary: A shift to a HOT regime is plausible if PPI inflation accelerates beyond CPI, driving the `divergence_z` into positive territory above 0.75 or 1.0 (1).
• Downside residual: A reversion to a COOL regime could occur if the negative divergence widens again, pushing `divergence_z` below -0.5 or -1.0 (1).

Time Horizon & Aggregation:

• Time Horizon: Cyclical (months) as the signal relies on year-over-year changes and rolling z-scores over 60 months (1).
• Aggregation Weight Hint: Medium, given its specific focus on the divergence of price pressures, offering distinct insights into inflation dynamics.

Macro Relevance:

• This signal primarily informs the Pricing and Inflation macro dimensions (1).
• It helps gauge the relative strength of cost-push (PPI) versus demand-pull (CPI) inflationary forces within the economic cycle, currently suggesting easing disinflation.
• This signal complements broader inflation indicators such as the Policy-Relevant Inflation (PCE) Signal (2) and the Market Implied Inflation Signal (3) by detailing the transmission of price pressures.

Data & References:

• Consumer Price Index for All Urban Consumers (CPIAUCSL), monthly, not seasonally adjusted, latest observation 2025-12-31 (1).
• Producer Price Index for All Commodities (PPIACO), monthly, not seasonally adjusted, latest observation 2025-12-31 (1).
• The `PPI_minus_CPI_YoY` and `divergence_z` datapoints are most influential for the current NEUTRAL state.
• Additional public datasets that would improve depth or reliability include the Employment Cost Index (ECI) for wage pressures, or various regional Fed manufacturing surveys' prices paid components.