EMU: PPI


Tue Apr 07 04:00:00 CDT 2015

Consensus Actual Previous Revised
Month over Month 0.1% 0.5% -0.9% -1.1%
Year over Year -2.9% -2.8% -3.4% -3.5%

Highlights
Following an even steeper revised fall in January, February producer prices (ex-construction) saw their first increase since last September. A 0.5 percent monthly jump was much sharper than anticipated but, with the index at the start of the year now posting a hefty 1.1 percent drop, annual PPI inflation was minus 2.8 percent, just a tick stronger than the market median call.

In fact underlying deflation pressures actually became slightly more intense as omitting energy the PPI dipped a further 0.1 percent versus January. This made for an annual decline of 0.8 percent after a minus 0.7 percent print last time. Energy charges were up 2.0 percent on the month.

Elsewhere within the PPI basket consumer goods edged 0.1 percent higher on the month but capital goods were only flat and intermediates fell 0.2 percent.

Regionally national PPIs rose in by far the majority of member states. France (0.8 percent) and Italy (0.5 percent) both saw sizeable monthly gains but increases in Germany and Spain (both 0.2 percent) were relatively modest.

Swings in energy costs continue to dominate the monthly profile to headline producer prices. However, the ongoing slide in the core index offers a timely reminder that the ECB still has a lot of work to do if HICP inflation is to get anywhere near the 2 percent mark over the foreseeable future.

Definition
The producer price index (PPI) is a measure of the average trading price of products and covers manufacturing, mining and quarrying and electricity, gas and water supply. The index is calculated excluding the construction sector.

Description
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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.