EMU: PPI


Tue Aug 04 04:00:00 CDT 2015

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

Highlights
June producer prices (ex-construction) saw their first fall since January. A 0.1 percent monthly dip was weaker than expected and soft enough to reduce annual PPI inflation from an unrevised minus 2.0 percent in May to minus 2.2 percent, its steepest decline since March.

The main downward impact on the overall index came from energy which recorded a 0.2 percent monthly fall, matching its May outturn and its the third consecutive drop. Excluding this category, the PPI was flat following small gains in the previous three months. The yearly core rate was minus 0.4 percent after minus 0.3 percent last time. Elsewhere, capital and durable consumer goods edged 0.1 percent firmer versus May and intermediates and consumer non-durables were flat.

Amongst the larger four states, prices in France matched the monthly headline fall and in Germany decreased 0.1 percent. The Italian PPI decreased 0.3 percent but Spanish prices were up 0.9 percent, the sharpest increase across the entire region. The most pronounced monthly fall was in Lithuania (1.5 percent) ahead of Slovakia (0.9 percent). By far the majority of members again posted annual PPI rates of less than zero.

The June PPI data show that pipeline inflation pressures in the Eurozone remain largely dormant. Deflation at the consumer level now seems to be less of a risk than it was a few months ago but the ECB cannot take anything for granted.

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.