Manufacturers' input costs and factory gate prices fell again in December. The former followed a shallower revised 0.7 percent drop in November with a monthly 2.4 percent decline at year-end while the latter was down 0.3 percent after a steeper revised 0.6 percent drop last time. Annual input price inflation now stands at minus 10.7 percent and its factory gate equivalent at minus 0.8 percent.
Inevitably, the main negative impact on overall output prices came from petroleum products which saw a monthly slide of nearly 4 percent. Other subsector changes were relatively small with the next steepest drop being in clothing, textile and leather (0.3 percent) and the sharpest rise in food products (0.4 percent). Core factory gate prices were flat on the month for a third successive occasion and 0.8 percent higher than in December 2013, a tick lower than the November rate.
Meantime, the fall in input costs was similarly dominated by energy where crude oil charges were some 13.2 percent lower on the month and alone subtracted 2.5 percentage points from the change in the headline index. Elsewhere within the basket, the only monthly moves of any size were in fuel and home food materials (both 0.8 percent) and imported food materials (0.9 percent).
Today's update on pipeline inflation poses no upside threats to the near-term outlook for the CPI. Indeed, so far the slump in oil prices has only really been reflected in the headline measures and to this extent should have little immediate impact on monetary policy. However, should second round effects become apparent, even the MPC's hawks are likely to drop their call for an imminent hike in Bank Rate.
The PPI measures prices at the producer level before they are passed along to consumers. The two major components are input prices - that is those paid by producers for things like raw materials - and output or factory gate prices. Output prices measure the prices producers are able to charge for the goods they produce.
The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax (VAT) or similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer.
The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The output price indexes measure change in manufacturer' goods prices produced and often are referred to as factory gate prices. Input prices are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day operations.
The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.
The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.