EMU: PPI


Wed Sep 02 04:00:00 CDT 2015

Consensus Actual Previous Revised
Month over Month -0.1% -0.1% -0.1% 0.0%
Year over Year -2.1% -2.1% -2.2% -2.1%

Highlights
Producer prices (ex-construction) matched expectations for a 0.1 percent monthly decline, their first decrease since January. Annual PPI inflation was minus 2.1 percent, also in line with the market consensus and unchanged from June's upwardly revised rate.

Inevitably, weaker energy prices, down 0.5 percent from the end of the second quarter, helped to depress the headline index. Excluding this category, the PPI was flat at June's level and 0.4 percent lower on the year, in line with its rate last time. Elsewhere prices were typically firmer, but not by much. Hence, durable and non-durable consumer goods as well as capital goods all saw a 0.1 percent monthly increase while intermediates were flat.

By far the majority of member states saw their respective national PPI decline versus June although amongst the larger countries, Germany was flat and Spain 0.1 percent firmer. France matched the overall regional dip. The steepest decline was in Estonia (1.5 percent) ahead of Greece (1.4 percent) and Belgium (1.0 percent). The sharpest rise was in Ireland (1.3 percent). All had below zero annual PPI rates bar Luxembourg (0.5 percent).

To all intents and purposes both overall and core Eurozone producer prices have been moving sideways since April. This may not offer much reassurance to the ECB with regards to meeting its medium-term HICP goals but it still constitutes a significant improvement from the succession of declines seen over much of 2014.

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.