Investors looking for a bit of good inflation news got some Wednesday morning.

A wide gap between rising consumer and producer prices is starting to significantly narrow. That should ease fears about runaway inflation since it will help Corporate America improve its profit margins -- and potentially get US stock prices climbing again.

Prices paid to US producers fell in August for a second month as fuel costs continued to retreat, reviving hopes that inflation may be nearing a peak. It’s a far cry from Tuesday’s inflation news, which showed August consumer prices rising more than expected and triggered the biggest drop in the S&P 500 Index in more than two years.

If producer prices continue to ease in the coming months, that could help support corporate earnings and, in turn, US equities, since a further deceleration in inflation would take some of the urgency off the Federal Reserve to extend jumbo rate hikes beyond this year, according to Gillian Wolff, senior associate analyst at Bloomberg Intelligence.

Producer prices “may be on the brink of turning positive soon,” Wolff explained. “PPI is coming down from its peaks at a pretty rapid pace. So as long as that continues, even if CPI remains a bit stubborn, it could alleviate some margin pressure.”

Ideally, that would also help alleviate constraints on stock prices, she added.

In the decade leading up to the coronavirus pandemic, forward 12-month operating margins for S&P 500 companies typically expanded alongside consumer prices. But a closer look shows the moves were more positively correlated with the spread between consumer- and producer-price indexes than to the CPI alone, according to BI.

That spread is currently negative, with producer costs rising faster than the prices that companies charge consumers. But it has been narrowing significantly from a steep negative reading of 3.4% a year ago. August’s figure was negative 0.4%, a vast improvement from negative 1.3% in July.

Negative spreads historically point to lower equity returns, while flat or higher spreads typically mean stronger gains for stocks. In fact, the S&P 500’s average monthly margin growth in the past three decades stands at 1.4%, according to BI. In the years after the CPI-PPI spread fell below zero into negative territory, margins for the index grew by only 1.1% on average, compared with 4.2% when it was above that threshold.

On average, one year after the CPI-PPI spread slid below zero, returns for the index were half as strong as when the spread was at least flat, BI data show. Of course, Wednesday’s PPI data also showed that core wholesale prices are running hotter than anticipated, echoing Tuesday’s CPI report in a sign of persistent inflation in the production pipeline. Even so, some portfolio managers remain bullish on US equities.

“It is important to note that CPI is a lagging indicator and PPI is a leading indicator,” wrote Jay Hatfield, founder and CEO at Infrastructure Capital Advisors, who is optimistic that inflation will steadily decline over the next six months as the Fed further reduces the money supply. “Consequently, the decline in inflation will first be reflected in PPI and slowly be reflected in CPI.”

This article was provided by Bloomberg News.