Manufacturers' raw material costs and factory gate prices were again very weak in January. For the former, a sharper than expected 3.7 percent monthly fall reduced annual input cost inflation by 2.6 percentage points to minus 14.2 percent. The latter posted a slightly steeper than anticipated 0.5 percent drop versus December to stand 1.8 percent short of its year ago level, down from minus 1.1 percent last time.
Inevitably the slide in factory gate prices reflected the slump in the energy market and petrol charges fell a further 7.9 percent on the month and alone subtracted 0.7 percentage points from the overall monthly change. The next steepest drop was food (0.3 percent). Elsewhere there were increases in clothing and textiles (0.7 percent), tobacco and alcohol (0.5 percent) and computer, electrical and optical equipment (0.3 percent). As a result, the core index actually rose 0.2 percent versus December although this still saw its annual rate slip from 0.8 percent to 0.5 percent.
Meantime the downward spiral in oil prices had an even larger impact input costs for which a 20.2 percent monthly slump in crude oil reduced total costs by more than 3.2 percentage points. Fuel was off 2.7 percent and imported chemicals fell 0.7 percent. The only monthly increase of note was in other home produced materials (1.7 percent).
The weakness of the January PPIs compounds downward revisions to both sets of data in December to underline increasing deflationary pressure on final product prices. No wonder the BoE has recently indicated that, in the right circumstances, a 0.5 percent Bank Rate might not be the ultimate floor after all.
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.