Fri Mar 13 07:30:00 CDT 2015

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.3% 0.1% to 0.7% -0.5% -0.8%
PPI-FD less food & energy - M/M change 0.1% 0.0% to 0.2% -0.5% -0.1%
PPI-FD less food, energy & trade services - M/M change 0.1% 0.0% to 0.2% 0.0% -0.3%
PPI-FD - Y/Y change -0.7% -0.1%
PPI-FD less food & energy - Y/Y change 1.0% 1.5%
PPI-FD less food, energy & trade services - Y/Y change 0.7% 0.9%

The PPI for total final demand fell 0.5 percent in February after decreasing 0.8 percent in January. Expectations were for a 0.3 percent rebound. Energy was flat, following a 10.3 percent drop while foods decreased 1.6 percent, following a 1.1 percent dip in January. Excluding food and energy, producer price inflation posted a minus monthly 0.5 percent after slipping 0.1 percent the month before. Analysts called for a 0.1 percent gain. Total excluding food, energy and trade services were unchanged after dipping 0.3 percent in January. Expectations were for a 0.1 percent rise in February.

The index for final demand goods decreased 0.4 percent after falling 2.1 percent in January. Leading the decrease, margins for final demand trade services dropped 1.5 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.)
The index for final demand services fell 0.5 percent after easing 0.2 percent the month before.

On a seasonally adjusted year-ago basis, PPI final demand was down 0.7 percent, compared to down 0.1 percent in January. Excluding food & energy, the PPI final demand was up 1.0 percent versus 1.7 percent the month before. Excluding food, energy, and trade services PPI inflation slowed to 0.7 percent on a year-ago basis, compared to 0.9 percent in January.

Inflation at the producer level remains essentially nonexistent. So far inflation numbers for February (including import prices) let the Fed stay loose on monetary policy.

Market Consensus Before Announcement
The producer price index for final demand decreased 0.8 percent January after falling 0.2 percent in December. This was the biggest drop for the PPI-FD on record. A sharp drop in energy pulled the headline number down. But weakness was more widespread. Excluding food and energy, producer price inflation slipped 0.1 percent after firming 0.3 percent the month before. 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. 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, which fell 0.7 percent.

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.