Wed Feb 18 07:30:00 CST 2015

Consensus Consensus Range Actual Previous Revised
PPI-FD - M/M change -0.5% -1.1% to -0.1% -0.8% -0.3% -0.2%
PPI-FD less food & energy - M/M change 0.1% 0.0% to 0.2% -0.1% 0.3% 0.3%
PPI-FD less food, energy & trade services - M/M change 0.1% 0.0% to 0.1% -0.3% 0.1% 0.1%
PPI-FD - Y/Y change -0.1% 1.1% 1.0%
PPI-FD less food & energy - Y/Y change 1.5% 2.1% 1.8%
PPI-FD less food, energy & trade services - Y/Y change 0.9% 1.4% 1.4%
PPI-FD Goods - M/M change -2.1% -1.2% -1.1%
PPI-FD Goods - Y/Y change -3.9% -1.2% -1.2%
PPI-FD Services - M/M change -0.2% 0.2% 0.3%
PPI-FD Services - Y/Y change 1.9% 2.2% 2.3%

The PPI for total final demand decreased 0.8 percent after falling 0.2 percent in December. The consensus forecast a 0.5 percent drop. A sharp drop in energy pulled the headline number down. Excluding food and energy, producer price inflation slipped 0.1 percent after firming 0.3 percent the month before. Expectations were for a 0.1 percent rise.

The index for final demand goods fell 2.1 percent after dropping 1.1 percent in December. The January decrease was led by prices for final demand energy, which fell a monthly 10.3 percent. The decline in prices for final demand goods was led by the index for gasoline, which dropped 24.0 percent. Prices for diesel fuel, jet fuel, basic organic chemicals, dairy products, and home heating oil also moved lower. Conversely, the index for residential electric power moved up 1.2 percent. Prices for pharmaceutical preparations and for fresh and dry vegetables also advanced. Prices for final demand foods decreased 1.1 percent after slipping 0.1 percent in December.

The index for final demand services eased 0.2 percent after advancing 0.3 percent in December. In January, prices for final demand services less trade declined 0.3 percent after rising 0.1 percent the month before. This was the first decline since falling 0.3 percent in September 2014. In January, a major contributor to the decline in the index for final demand services was prices for outpatient care (partial), which fell 0.7 percent.
On a seasonally adjusted year-ago basis, PPI final demand was down 0.1 percent, compared to up 1.0 percent in December. Excluding food & energy, PPI final demand was up 1.5 percent versus 1.8 percent the month before.

Overall, inflation at the manufacturers' level is muted even after discounting energy declines. The Fed is likely to see the numbers as allowing delayed rate increases.

Market Consensus Before Announcement
The producer price index for final demand fell 0.3 percent in December, following a decline of 0.2 percent in November. Excluding food and energy, producer price inflation firmed 0.3 percent, following no change in November. The index for final demand goods dropped 1.2 percent after falling 0.7 percent in November, the sixth consecutive decrease. The December decline was led by prices for final demand energy, which fell a monthly 6.6 percent. The index for final demand goods less foods and energy rebounded 0.2 percent, following a dip of 0.1 percent in November. Prices for final demand foods declined 0.4 percent after decreasing 0.2 percent in November. The index for final demand services advanced 0.2 percent in December after inching up 0.1 percent in the prior month. In November, prices for final demand services less trade firmed to 0.2 percent after rising 0.1 percent in November.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measure the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.

The PPI measures prices at the producer level before they are passed along to final consumers. 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.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers 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.

Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI's lower volatility. Also, the PPI does not include owners' equivalent renta large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the "core PPI" which excludes these two components.

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.