Producer prices have climbed 6.3%, while consumer prices are up just 3.7%. This chart reveals who absorbs the difference.

A 6.3% annual rise in the Producer Price Index in September, against 3.7% for the Consumer Price Index, left the widest gap since 2022. Within the S&P 500, that difference accrues to energy and technology companies while the others bear the cost. Shoppers face their share in 2027.

September's annual producer price increase of 6.3% was the strongest since December 2022, while consumer prices rose 3.7%. The two monthly inflation measures published by the Bureau of Labor Statistics (BLS) had diverged. The Producer Price Index (PPI) tracks what US businesses receive for their sales; the Consumer Price Index (CPI) tracks what households pay. Their 2.6-point gap ranks eighth widest in the 16 years since the PPI took its current form. All seven months with a larger gap fell between August 2021 and April 2022.

About 2% below the record reached on 6 October, the S&P 500 is also heading for its second-highest profit margin since FactSet began tracking the measure in 2009. FactSet's figures, combining reported results with estimates, put this quarter's profit at 14.9 cents for every dollar of sales. Those outcomes can coexist because the index contains both the businesses receiving the 6.3% increase and those paying it. This week's company results have begun to reveal which is which.

Two sectors underpin the average

Differences in the composition of the two indices explain some of the divergence. Housing accounts for a third of the CPI but is outside the PPI, while energy producer prices jumped 10.8% in September alone. Beyond that arithmetic, money is passing from businesses buying fuel, resin and freight to those supplying them. Both sides of those transactions sit within the S&P 500.

With quarterly oil prices averaging $85.68 per barrel rather than $64.97 a year earlier, FactSet puts the energy sector's margin at 14.8%, against 8.1%, and earnings growth at 127.6%. Information Technology's margin has meanwhile increased to 32.3% from 27.5%. Margins are lower than a year earlier in six of the eleven sectors, among them Consumer Staples, Health Care and Consumer Discretionary. Although 48% of index constituents now make less profit per dollar of sales than a year ago, the aggregate margin has risen almost two points. The June quarter's record of 17% included paper gains on Alphabet's (GOOG, GOOGL) and Amazon's (AMZN) holdings in Anthropic. Consecutive quarters have therefore delivered the two highest margins since 2009: the first driven by an AI company's valuation, the second by a tanker war.

Margins fell last time despite higher prices for shoppers

Across seven months in 2021 and 2022, the gap exceeded today's level, reaching its widest point of 3.5 points in August 2021. As it approached that peak, the index's margin reached a then-record 13.1% in the June 2021 quarter. By six quarters later, the margin had dropped to 11.2%, its lowest since 2020. Eight of the eleven sectors recorded year-on-year margin declines in the December 2022 quarter. Energy was an exception, rising to 12.9% from 9.3%; it is repeating that performance now, but from a higher starting point.

It was rising consumer inflation that closed the gap. As businesses passed on costs, the CPI reached 9% in June 2022, without preventing margins from falling. Producer price inflation remained at 10% or more for eight months; only after that run ended did shelf prices catch up. Between its January 2022 peak and October 2022 trough, the S&P 500 lost about 25%. What sets this episode apart is the Federal Reserve (Fed). During that market decline it lifted rates from zero to above 4%; this time it starts near 4%, following a rise on 16 September.

Soap, cigarettes and pickup trucks reveal who can pass on costs

Thursday's results from Procter & Gamble (PG), the index's largest household-goods manufacturer, showed a 4% sales increase in the quarter to September. Higher volumes contributed 2.4 points and higher prices 0.4. Gross margin, the share of sales left after producing the goods, contracted by 1.5 points. Commodity costs accounted for a 1.4-point reduction, while pricing restored 0.2. Assuming Brent remains at $100, the company now projects an after-tax cost of $1.4 billion for raw materials, energy and freight this fiscal year, compared with $1 billion expected in July. Recovering that cost "will take record productivity levels", Chief Financial Officer Andre Schulten said, adding that "the second component is pricing with innovation" and "the third component here is time".

A similar picture emerges across the index's Consumer Staples sector, where the margin has slipped to 6.3% from 6.5% a year earlier: volumes are rising but prices are unchanged as costs increase. Philip Morris International (PM), by contrast, increased cigarette prices by 8.9%, maintained shipments at the year-earlier level and lifted gross profit by 6.7%. That is the pricing power of nicotine. At General Motors (GM), commodity, freight and memory-chip costs were put at about $2 billion this year, yet the prices commanded by its trucks helped raise the North American margin by 2.5 points. Whoever cannot replicate those two companies' response bears the gap. September's PPI showed a 30.3% fall in the gasoline retailing margin index alongside a 20.3% rise in gasoline prices. Nowhere else in the release is the gap so literally absorbed by a margin.

Price recovery depends on time

For Procter & Gamble, commodity costs amounted to 5% of earnings in the reported quarter, compared with 8% for the year. That leaves a greater burden across the remaining three quarters than in the first. Price increases intended to recoup the cost are "generally timed with modular resets", when retailers reorganise their shelves, putting their arrival in the CPI in 2027. According to Schulten, "there is no way to recover this level of commodity pressure without pricing", while "the industry generally is pricing up". He made the same point while saying, "I cannot announce pricing, and I will not announce pricing in any way, shape, or form."

For 2027, analysts project 16% earnings growth for the S&P 500 against revenue growth of 9.5%, implying another expansion in margins. Yet its soap, cigarette and truck manufacturers say they will begin the year with costs above last year's. The index trades at 19 times forecast earnings for the next twelve months, slightly below its five-year average. The vulnerability therefore lies in those forecasts rather than the valuation applied to them. The Fed's next meeting is on 28 October, and most committee members have publicly indicated that they expect another rate rise by year-end. Price increases arriving in 2027 will feed into the CPI against which the Fed is raising rates. For their timing, companies offer only the next shelf reset.

The chart points to key support levels

About half the S&P 500's advance from its September low to the 6 October record has now been surrendered. For the second time since September, the index trades just below its 50-day average. Before this week's results, the daily Stochastic Relative Strength Index (Stoch RSI), a momentum indicator, had already turned lower from close to 70. The retreat therefore preceded Procter & Gamble's announcement. Since the March low, successive higher lows have formed above an ascending 50-day average, with a ceiling at 7,800 breached only by the record. The key level is 7,700, where that 50-day average sits.

Closes below 7,700 leave the bias to the downside. The initial test comes at 7,500, both the September low and the latest higher low in the sequence. Closing below that level would mark the first lower low since March. Around 7,300, the 200-day average marks the point at which the 2022 experience of six quarters of contracting margins becomes the chart's base case, rather than merely a precedent. A daily close back above 7,800 would invalidate that view. Such a move would mean investors were paying for energy and technology margins while looking past the other nine sectors. Alternatively, falling oil prices could close the gap from the top, reducing consumer companies' costs before eroding energy-sector profits. October's CPI is due on 10 November, followed by the PPI on 13 November. A narrowing driven by lower producer inflation is the outcome the index can afford.