|Month over Month||-0.1%||-0.3%||0.2%||0.3%|
|Year over Year||-3.1%||-2.7%||-2.6%|
Producer prices fell a steeper than expected 0.3 percent on the month in June. The decline, which effectively cancelled out a stronger revised 0.3 percent gain in May, reduced annual PPI inflation from minus 2.6 percent to minus 3.1 percent, its weakest reading since February.
Overall prices were hit by a 1.0 percent monthly drop in energy charges and without this the PPI would have been flat at May's level and 0.1 percent firmer than in June 2014. Elsewhere, consumer goods slid 0.2 percent while intermediates were flat and capital goods 0.1 percent stronger.
Despite June's drop, headline producer prices have been trending sideways for much of the year. This probably means that the worst of the deflation risks have now passed but the overall picture clearly remains very soft.
The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Individual PPIs are calculated for the domestic and overseas markets; the former is regarded as the more important.
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.
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