Kevin takes the spread between the index of Finished Goods, less the cost inputs of the raw materials (Crude Goods).
The spread has flipped negative in 2003, and has significantly widened since then. This suggests that inflationary price pressures are building, mostly due to higher raw material costs. Ordinarily, there is often a lag between pass-through costs, and pricing pressures — but the current situation represents an extreme.
This leaves manufactures with one of two options: They can raise prices, or they can suffer margin pressure.
"This shows increasing pressure on producers to rein in raw materials costs that are not keeping pace with finished goods costs. In other words, the pass through of increasing costs is reaching extreme levels. Virtually every conference call we listen to says the same thing. That is why the consumer is so important now. Corporate profits are getting crushed right as we head into a consumer recession."
Good stuff — thanks, Kevin.