Producer prices were a little softer than expected in April. Hence, input costs were up 0.4 percent on the month to reduce their annual deflation rate from 12.8 percent in March to 11.7 percent while factory gate prices edged just 0.1 percent firmer to leave yearly output price inflation steady at minus 1.7 percent.
Within the minimal monthly increase in factory gate prices the only gains of note were in the paper and printing and petroleum product categories (both 0.4 percent). Other rises were 0.2 percent or less and there were 0.1 percent falls in clothing, textile and leather as well as in chemicals and pharmaceuticals. Core prices were flat on the month and 0.1 percent higher on the year, matching their unrevised March outturns.
The monthly increase in input costs was a dominated by a 2.9 percent jump in crude oil and further supported by a 0.9 percent gain in imported parts and chemicals and a 0.6 percent advance in home food materials. Imported food materials (minus 2.7 percent) were by far the weakest subsector.
The April PPI data do nothing to suggest that CPI inflation will not continue to undershoot its 2 percent target for a good deal longer yet.
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.