Thu Mar 31 01:45:00 CDT 2016

Consensus Actual Previous
Month over Month -0.3% -0.5% -0.8%
Year over Year -4.1% -2.5%

Excluding construction, producer prices fell for a third straight month in February. A 0.5 percent drop versus their January level was the smallest in the sequences but still sharp enough to see the annual rate of PPI inflation slump from minus 2.7 percent to minus 4.1 percent, its weakest outturn since October 2009.

Prices of mining and quarrying, energy and water dropped 1.6 percent on the month and did much of the damage. However, declines were broad-based amongst the major product groups with food, drink and tobacco down 0.1 percent, coke and refined petroleum products off 0.5 percent and electrical machinery 0.2 percent weaker. Transport equipment (minus 0.2 percent) and the other manufactured products category (minus 0.1 percent) also posted fresh falls.

The February report puts the headline PPI some 7.8 percent below its March 2013 peak. Since that date the trend decline has been marked and today's results simply confirm the absence of any upward pressure on consumer prices from the manufacturing sector.

The producer price index (PPI) is a measure of the average transaction price, exclusive of VAT, for goods from industrial activities sold on the French market.

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.