Producer prices continued to fall in July. Crude oil continued to drive down input prices, feeding through to a drop in output prices of petroleum products.
Factory gate prices moved broadly in line with expectations in July. An unchanged level from June the annual declined to 1.6 percent. Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, were up 0.3 percent in the year to July 2015, compared with 0.1 percent last month. Petroleum products declined 15.8 percent on the year.
At the same time, input costs decreased 0.9 percent after declining 1.3 percent on the month in June. This made for a 12.4 percent annual decrease. Core input prices, which exclude the more volatile food, beverage, tobacco and petroleum products dropped 4.9 percent in the year to July 2015, compared with a fall of 4.7 percent in the year to June 2015. Falling crude oil prices, which plunged by 39.9 percent from July of 2014, were the dominant factor in declining input prices.
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.