Factory gate prices were marginally firmer than expected in October. A flat reading followed an unrevised 0.1 percent monthly decline in September and was the first non-negative outcome since June. The annual rate rose to minus 1.3 percent from minus 1.8 percent last time.
By and large the basket components were relatively stable with the main monthly changes occurring in petroleum products (minus 0.6 percent) and tobacco and alcohol (0.5 percent). The core output price index dipped 0.1 percent from the end of last quarter and, at 0.3 percent, its annual rate was a tick above its September mark.
Meantime, input prices were up a monthly 0.2 percent following a slightly weaker revised 0.5 percent monthly increase in September. Amongst the major components, fuel was up 1.6 percent, crude oil 1.9 percent and imported food materials 1.8 percent. The main offset came from imported parts and equipment where prices slumped 2.2 percent.
There is nothing particularly new in the October data which continue to indicate an absence of any meaningful inflation pressures within the manufacturing sector. As the October CPI report signalled (see today's calendar entry), UK inflation remains stuck around zero and if the PPI outturns are anything to go by, is very unlikely to accelerate significantly for some while yet.
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.