EMU: PPI


Wed Jan 06 04:00:00 CST 2016

Consensus Actual Previous
Month over Month -0.2% -0.2% -0.3%
Year over Year -3.1% -3.2% -3.1%

Highlights
Producer prices (ex-construction) continued to weaken in November. A 0.2 percent monthly drop was in line with expectations and, following an unrevised 0.3 percent fall in October, left the headline PPI 3.2 percent lower on the year for a third consecutive month. Prices have still not risen since May.

A 0.3 percent monthly decline in energy costs weighed on the overall basket but even without this category the PPI was still down 0.2 percent, matching the fall registered in October. Elsewhere the main negative pressure came from intermediates which were off 0.3 percent. Non-durable consumer goods also slid 0.2 percent while capital goods and consumer durables were flat.

Regionally the majority of EMU states saw monthly declines with the most marked in Cyprus (1.6 percent) ahead of Estonia (1.1 percent). Amongst the larger countries, France posted a 0.2 percent gain but Germany and Spain were both off 0.2 percent and Italy 0.6 percent.

The November data put Eurozone producer prices some 6 percent short of their peak level back in February 2013. Bar a temporary, and only modest, blip early in 2015, prices have weakened quite steadily over the entire period and if the latest PMI results are anything to go, continued to decline at year-end. Core prices are holding up rather better but even here the trend remains worryingly soft. In the absence of a surprise bounce in commodity charges, the prospects of a rebound in CPI inflation anytime soon are not good.

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.