Fri Jan 30 04:00:00 CST 2015

Consensus Actual Previous Revised
Month over Month -0.6% -0.8% -0.2% -0.1%
Year over Year -2.1% -1.6% -1.5%

Producer prices fell a steeper than expected 0.8 percent on the month in December following a smaller revised 0.1 percent drop in November. The latest decline, which was the third in a row, reduced annual PPI inflation from minus 1.5 percent to minus 2.1 percent, equalling its weakest print since August.

Energy costs were down some 2.4 percent versus mid-quarter and were fully 7.1 percent short of their level in December 2013. Other basket components were more robust, albeit still soft. Hence consumer goods prices edged 0.1 percent higher as did intermediates but capital goods recorded no change. Excluding energy the PPI was flat on the month and 0.3 percent firmer on the year.

The core element of the December PPI shows that underlying pipeline deflation pressures are nothing like as marked as the headline data might suggest. However, even here the annual rate is far too close to zero for comfort and the longer the decline in overall prices continues, the greater is the risk of second round effects.

The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Individual PPIs are calculated for the domestic and overseas markets; the former is regarded as the more important.

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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction.

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 they 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.