Wed Sep 30 05:00:00 CDT 2015

Consensus Actual Previous
Month over Month -0.3% -0.7% -0.3%
Year over Year -3.6% -3.1%

Producer prices continued to spiral south in August. A 0.7 percent monthly drop followed a 0.5 percent decline in July (see today's calendar entry) to shave a further 0.6 percentage points off the annual PPI inflation rate which now stands at minus 3.6 percent. Prices have not registered positive monthly growth since May and August's yearly rate was the weakest since January.

Energy prices were down a further 1.9 percent versus July and were wholly responsible for the fall in the overall index. Excluding this category the PPI was flat on the month and unchanged from a year ago. Elsewhere consumer goods edged just 0.1 percent higher from the start of the quarter while intermediates and capital goods were flat.

The ongoing decline in producer prices means that, despite now five successive prints above zero, a return to a negative CPI annual inflation rate remains a very real risk.

The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Individual PPIs are calculated for the domestic and overseas markets; the former is regarded as the more important.

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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction.

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 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.