|M/M % change||-0.2%||-0.3%||-0.1%|
|Y/Y % change||-6.3%||-6.4%||-6.1%|
The combined producer and import price index behaved much as expected in July. A 0.3 percent monthly dip was the fourth fall in a row (and the eleventh in the last twelve months) and put the headline measure 6.4 percent below its level a year ago, exceeding the record annual decline posted in July 2009.
The latest monthly decrease was attributable to a 0.3 percent slide in import costs and a 0.2 percent decline in domestic producer prices. Prices were lower in particular for petrol and petroleum products as well as for watches and electronic components and circuit boards.
The headline composite index combines domestic producer prices and import prices into a single measure. This can be volatile and financial markets will normally look at the core index for a more reliable guide to underlying developments.
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. Producer prices are more volatile than consumer prices. While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. 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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