GB: Producer Price Index

Tue Mar 24 04:30:00 CDT 2015

Consensus Actual Previous Revised
Output-M/M 0.0% 0.2% -0.5% -0.4%
Output-Y/Y -2.0% -1.8% -1.8% -1.9%
Input-M/M 1.6% 0.2% -3.7% -3.6%
Input-Y/Y -12.3% -13.5% -14.2% -14.1%

Producer prices staged a partial rebound in February. Following sizeable falls in both measures in December and January input costs edged up a surprisingly small 0.2 percent on the month, an increase matched by their output price counterpart. As a result, annual input cost inflation moved up from minus 14.1 percent to minus 13.5 percent while factory gate inflation edged just 0.1 percentage points firmer to minus 1.8 percent.

Most components of the output price basket were relatively stable over the month; the only notable exception being petroleum products which saw a 1.5 percent spike. As a consequence, core factory gate charges were only slightly weaker, posting a 0.1 percent rise versus January to stand 0.2 percent higher on the year after a 0.3 percent annual gain last time.

Meantime, the lack of volatility in overall input costs masked a near-10 percent monthly jump in crude oil and a 3.8 percent slump in imported metals. Imported chemicals (minus 1.8 percent) and imported parts and equipment (minus 1.4 percent) were similarly soft due to the buoyancy of the pound.

The February PPIs point to little change in pipeline pressures on UK CPI inflation. However, the impact of sterling's strength is becoming increasingly apparent and it is of no surprise that the MPC highlighted this as a threat to its inflation target in this month's MPC meeting minutes. The BoE will not be unhappy with the unit's drop since the middle of the month.

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.