FR: PPI


Tue Jun 30 01:45:00 CDT 2015

Consensus Actual Previous
Month over Month 0.0% -0.5% -0.4%
Year over Year -1.7% -2.0%

Highlights
Producer prices fell a surprisingly sharp 0.5 percent versus April when they were down an unrevised 0.4 percent. Annual PPI inflation was minus 1.7 percent, up from minus 2.0 percent last time as prices fell even more sharply a year ago.

The monthly decline was largely due to a 3.7 percent slump in electricity, gas, water and garbage charges although food and drink (minus 0.1 percent) as well as electrical equipment, information technology and machines (minus 0.2 percent) also made negative contributions. On the upside, coking refining products jumped 4.5 percent and the other manufactured goods category increased 0.2 percent. As a consequence overall manufactured goods prices were 0.3 percent higher than in April.

Today's PPI figures suggest that underlying pressures on CPI inflation remain muted. Deflation risks may have eased of late but with trend economic growth still sluggish, they remain a very real threat.

Definition
The producer price index (PPI) is a measure of the average transaction price, exclusive of VAT, for goods from industrial activities sold on the French market.

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 consumer price index (CPI).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction.

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 they 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.