EMU: PPI


Tue Jun 02 04:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.1% -0.1% 0.2%
Year over Year -2.2% -2.3%

Highlights
Producer prices (ex-construction) were weaker than expected in April. A 0.1 percent monthly drop was the first decline since January and followed and unrevised 0.2 percent rise in March. Annual PPI inflation was just a tick higher at minus 2.2 percent.

However, the monthly dip in overall prices was fashioned by a 0.6 percent drop in energy charges and without which the PPI would have edged 0.1 percent higher on the month, its second consecutive increase, and matched March's 0.5 percent yearly decline. Amongst the other major subsectors, consumer goods posted no monthly change while capital goods were 0.1 percent firmer and intermediates 0.3 percent stronger.

Nonetheless, all member states bar Luxembourg (0.8 percent) and Slovenia (0.0 percent) still show negative annual PPI rates and amongst the larger countries, a 0.4 percent monthly fall in France and a 0.3 percent drop in Italy were hardly reassuring.

To this end the April PPI data offer a timely reminder that, despite today's stronger than expected flash May HICP (see calendar entry), the ECB has plenty of work to do yet. Tomorrow's central bank meeting will likely be more concerned with Greek developments than Eurozone deflation risks, but there is certainly no room for complacency that policy is on course to achieve its medium-term price stability goals.

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.