Wed Dec 30 03:00:00 CST 2015

Actual Previous Revised
Month over Month -0.6% -0.1% -0.3%
Year over Year -4.2% -3.5% -3.7%

Producer prices were very weak in November. Following a steeper revised 0.3 percent monthly decline in October, the PPI fell a further 0.6 percent to increase the annual deflation rate from 3.7 percent to 4.2 percent, its strongest mark since October 2009.

A 1.2 percent monthly decrease in energy prices hit the headline hard but even excluding this subsector the PPI was down 0.3 percent versus October and 0.5 percent lower on the year. Indeed, all of the major categories registered fresh monthly declines with consumer goods and intermediates down 0.4 percent and capital goods off 0.2 percent.

Producer prices have now fallen for six successive months and annual PPI inflation has not been positive since February 2013. Against this backdrop, annual CPI inflation, already just 0.1 percent in November, looks very likely to fall back below zero over coming months.

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.