Fri Mar 06 03:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.6% -1.6% -0.8%
Year over Year -3.7% -2.1%

Producer prices were very weak in January. A 1.6 percent monthly slump was the steepest in more than six years and saw annual PPI inflation slide from minus 2.1 percent in December to minus 3.7 percent, its most negative reading since October 2009.

However, the underlying picture was a good deal firmer and without a 4.4 percent monthly nosedive in energy costs the PPI would have been unchanged at its December level and 0.1 percent firmer than in January 2014. Elsewhere in the PPI basket the only other monthly drop was in intermediates (0.2 percent). Consumer durables (0.3 percent) and non-durables (0.1 percent) as well as capital goods (0.3 percent) all recorded modest gains.

Nonetheless, headline producer prices have now fallen in six of the last seven months (and ten of the last twelve) and stand more than 7 percent below their peak in August 2012. In the absence of a surprise bounce in the oil market the near-term outlook for CPI inflation remains extremely subdued.

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.