While input costs matched expectations in August, factory gate prices once again undershot the market consensus. The former fell 2.4 percent on the month after a steeper revised 1.2 percent decline in July to stand some 13.8 percent lower on the year. At the same time, output prices were down 0.4 percent versus July, their third consecutive decrease, and now show a yearly drop of 1.8 percent.
Within the factory gate basket, the only monthly movement of note was in petroleum products where prices slumped 3.2 percent. The next largest absolute change was in food products (minus 0.4 percent). As a result, the core index was unchanged on the month and just 0.1 percent higher on the year following a 0.3 percent annual rise at the start of the quarter.
Inevitably, the nosedive in raw material and fuel costs was dominated by crude oil which posted a near-14 percent decline on the month. There were also significant monthly falls in imported food materials (2.9 percent), imported metals (2.4 percent) and fuel (1.0 percent). The only increase of any size was in imported parts and equipment (0.9 percent).
The broad-based weakness of both PPI series continues to indicate minimal upside pressure on consumer prices from the manufacturing sector. Indeed, the August update increases the likelihood of a return to a negative annual CPI rate before the end of the year.
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.