Producer prices were a little softer than expected in May. Input costs were down 0.9 percent on the month but only after a sharply stronger revised 1.4 percent rise in April and now show an annual fall of some 12.0 percent. More importantly, factory gate prices were just 0.1 percent firmer than at the start of the quarter and stood 1.6 percent lower on the year following a 1.7 percent decline last time.
Within the monthly gain in overall output prices the only increase of note was in petroleum products where charges jumped 2.0 percent. Most other subsectors were relatively subdued and the core index was only flat at April's level and 0.1 percent higher on the year, also matching its previous reading.
Meantime, the monthly slide in input costs was dominated by a 6.9 percent slump in home food materials and a 2.0 percent fall in imported food materials. Imported metals were also off 1.6 percent and other imported materials 1.5 percent weaker. Partial offsets were provided by gains in crude oil (2.4 percent) and other home produced materials (1.2 percent).
The latest update on pipeline inflation pressures continues to point to a generally subdued profile to the CPI over coming months. This will not come as any surprise to the monetary authorities but a clearly sub-2 percent headline inflation rate should still increase the likelihood of no hike in Bank Rate until 2016.
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.