|Month over Month||-0.2%||-0.5%||-0.6%|
|Year over Year||-3.8%||-3.0%||-3.5%|
Producer prices fell a further 0.2 percent on the month in September. The decrease followed a slightly smaller revised 0.6 percent drop in August and was the fifth decline in the last six months. The annual rate of deflation steepened from 3.5 percent to 3.8 percent.
Prices were hit by a 0.5 percent monthly decline in energy and excluding this category the PPI was only 0.1 percent lower versus August and flat on the year. Consumer goods and capital goods posted 0.1 percent monthly increases but intermediates were off 0.3 percent.
The ongoing weakness of producer prices the PPI is now some 8 percent below its August 2012 peak argues strongly in favour of a sustained subdued CPI inflation profile for some time to come.
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.
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