EMU: PPI


Tue May 05 04:00:00 CDT 2015

Consensus Actual Previous Revised
Month over Month 0.3% 0.2% 0.5% 0.6%
Year over Year -2.3% -2.3% -2.8%

Highlights
Producer prices (ex-construction) rose a slightly smaller than expected 0.2 percent on the month in March. However, the increase followed a marginally firmer revised 0.3 percent rise in February to put annual PPI inflation at minus 2.3 percent, up from minus 2.8 percent last time and in line with the market consensus.

March's modest monthly advance was led by energy where charges were up 0.5 percent (but still down 6.8 percent on the year). Nonetheless, all the other sectors also posted gentle rises with capital, durable and non-durable consumer goods all 0.1 percent higher versus February and intermediates 0.2 percent stronger. As a result, the core PPI also advanced a monthly 0.2 percent and, at minus 0.5 percent, its annual rate was similarly a couple of ticks above its mid-quarter print.

That said, five national PPIs posted fresh monthly falls including Cyprus (3.3 percent), Latvia (0.7 percent) and Italy (0.1 percent). The steepest increase was in Ireland (2.6 percent) ahead of Belgium (1.7 percent) and Portugal (0.8 percent). Only Luxembourg has a yearly PPI inflation rate above 0.1 percent and by far the majority still show falls in excess of 1 percent.

What was the first back-to-back increase in overall Eurozone producer prices since January/February 2013 will be well received at the ECB. Nonetheless, if underlying trends are turning they are doing so only very slowly and certainly not quickly enough to allow any complacency over the outlook for HICP inflation.

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.