EMU: PPI


Wed Dec 02 04:00:00 CST 2015

Consensus Actual Previous Revised
Month over Month -0.4% -0.3% -0.3% -0.4%
Year over Year -3.2% -3.1% -3.1% -3.2%

Highlights
Producer prices (ex-construction) were marginally firmer than expected in October but still posted their fourth consecutive monthly decline. In fact a 0.3 percent fall followed a steeper revised 0.4 percent drop in September and, at 3.1 percent, the annual rate of PPI deflation was just a tick less than last time.

Energy prices, down 0.4 percent on the month, again biased the headline data weaker but even excluding this sector prices were off 0.2 percent versus September and, at minus 0.7 percent, a tick softer on their yearly rate. Capital goods and durable consumer goods showed no monthly change but non-durables decreased 0.2 percent and intermediates 0.4 percent.

Regionally most national headline PPIs registered monthly declines, the only exception of any note being Estonia (0.4 percent). The steepest slide was in Ireland (1.1 percent), ahead of Spain (0.7 percent) and Lithuania and the Netherlands (both 0.5 percent).

Following the worrying weak (flash) November HICP just announced, the continued run of deflationary PPIs can only help to cement a growing market conviction that the ECB will have to ease again to have any chance of fulfilling its inflation remit.

Definition
The producer price index (PPI) is a measure of the average trading price of products and covers manufacturing, mining and quarrying and electricity, gas and water supply. The index is calculated excluding the construction sector.

Description
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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.