Producer prices were marginally weaker than expected in November. A 0.2 percent monthly drop in factory gate charges followed a revised 0.1 percent dip in October and steepened their annual rate of decline from 1.4 percent to 1.5 percent. Input prices were off a monthly 1.6 percent after no change in October which saw their yearly rate fall even further into negative territory at minus 13.1 percent.
Within the output price basket, the main monthly fall was in petroleum products (0.9 percent) ahead of clothing, textile and leather (0.4 percent) and chemicals and pharmaceuticals (0.3 percent). There were no rises of any significance leaving the core index to match the monthly headline change which, in turn, lowered its yearly rate to minus 0.1 percent.
Meantime, the latest monthly slide in raw material and fuel costs reflected broad-based declines, notably in crude oil (7.3 percent), imported metals (3.8 percent) and imported chemicals (2.1 percent). Other imported materials (1.1 percent) were also significantly weaker and the only increase of any size was in fuel (1.6 percent).
Although November's CPI was marginally firmer than anticipated, the ongoing weakness of producer prices continues to argue in favour of a persistently subdued inflation profile for much of 2016. If so, the BoE will struggle to justify any hike in interest rates and, whatever the Fed elects to do tomorrow, Bank Rate looks likely to be fixed at its current 0.5 percent level for many months to come 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.