Thu Jul 02 04:00:00 CDT 2015

Consensus Actual Previous Revised
Month over Month 0.1% 0.0% -0.1%
Year over Year -2.0% -2.0% -2.2% -2.1%

Producer prices (ex-construction) were unchanged in May following an unrevised 0.1 percent dip in April. Annual PPI inflation was minus 2.0 percent, down a tick from the rate at the start of the quarter and the strongest reading since last November. The results were on the soft side of expectations.

Capital goods and consumer goods were also unchanged from their respective April levels while a 0.3 percent monthly drop in energy charges was offset by an equivalent increase in the price of intermediates. Excluding energy the PPI was up 0.1 percent on the month and, at minus 0.3 percent, similarly a tick higher on its yearly rate.

Amongst the big four states, the national PPI was down a monthly 0.6 percent in France but flat in Germany and 0.2 percent and 0.3 percent firmer in Italy and Spain respectively. With the exception of just Luxembourg (0.6 percent) and Slovenia (0.1 percent) all members still recorded sub-zero annual PPI inflation rates.

Core producer prices have now risen for three months in a row and are up a cumulative 0.5 percent over the period. This should be very well received at the ECB as it signals a significant diminution in deflationary risks. That said, overall pipeline prices remain very weak and corporate pricing power continues to be severely restricted by highly competitive markets. Stronger growth of domestic demand is needed to ensure that HICP inflation moves in the right direction on a sustainable basis.

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.

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.