Factory gate prices rose 0.2 percent on the month in March, in line with expectations and firm enough to leave their annual inflation rate unchanged at February's marginally stronger revised minus 1.7 percent. Input costs were firmer than anticipated although even here a 0.4 percent monthly increase still put costs some 13.0 percent below their level in March 2014.
Outside of a 2.4 percent spike in petroleum product charges, most components of the output price basket posted relatively muted monthly changes. As a result, core factory gate prices were just flat versus February and 0.1 percent higher on the year after a 0.3 percent annual increase last time.
Input costs were boosted primarily by a 4.3 percent monthly jump in crude oil and sizeable, if smaller, rises in other imported materials (0.8 percent) and other home produced materials (0.6 percent). However, gains here were almost offset by falls in fuel (0.9 percent), imported food (1.4 percent) and imported metals (1.1 percent).
Overall the PPI update leaves intact a still soft outlook for CPI inflation. There is nothing here for the BoE MPC's hawks to get excited about.
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.