Mon Nov 30 05:00:00 CST 2015

Actual Previous Revised
Month over Month -0.1% -0.2% -0.3%
Year over Year -3.5% -3.8% -3.9%

Producer prices fell for a fifth successive month in October. A 0.1 percent dip followed a slightly steeper revised 0.3 percent drop in September and was small enough to reduce the annual rate of PPI deflation from 3.9 percent to 3.5 percent.

At a sector level, prices were down a monthly 0.4 percent in intermediates and 0.1 percent in energy, flat in consumer goods and up 0.1 percent in capital goods. Excluding energy the PPI declined 0.2 percent versus September and was 0.1 percent lower on the year.

October's monthly headline dip was the shallowest since prices last rose in May. However, deflation pressures remain significant and the level of the PPI last month was some 8.2 percent below its peak back in August 2012. There is nothing here to suggest that CPI inflation will be on the up any time in the foreseeable future.

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.