UK factory gate prices were just fractionally stronger than expected in September. A 0.1 percent monthly dip followed a marginally steeper revised 0.5 percent fall in August to reduce the annual rate of decline from 1.9 percent to 1.8 percent.
Most subsector prices were relatively stable on the month with the notable exceptions of petroleum products (minus 1.2 percent) and, to a much lesser extent, food (minus 0.4 percent). Consequently the core index rose 0.1 percent and, at 0.2 percent, its yearly change was a couple of ticks up on its previous posting.
Meantime, input costs matched expectations for a 0.6 percent monthly gain but with August's drop revised steeper to 3.0 percent, their annual rate of decline was surprisingly sharp at 13.3 percent. A 1.1 percent increase in crude oil charges added nearly 0.2 percentage points to the overall monthly change and there were sizeable rises too in imported food and imported chemicals (both 0.6 percent, imported parts and equipment (1.5 percent) and other imported materials (0.8 percent). However, home food materials fell 0.7 percent and other home produced materials were down 0.4 percent.
Today's update on pipeline inflation pressures does nothing to alter a very subdued near-term outlook for the CPI. There is nothing here to increase the rapidly diminishing prospect of an early hike in Bank Rate.
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.