|PPI-FD - M/M change||0.3%||0.0% to 0.4%||-0.1%||-0.2%|
|PPI-FD less food & energy - M/M change||0.2%||0.1% to 0.3%||-0.1%||0.0%|
|PPI-FD - Y/Y change||-0.1%||0.0%|
|PPI-FD less food & energy - Y/Y change||1.0%||1.2%|
|PPI-FD less food, energy & trade services - M/M change||0.0%||0.1%|
|PPI-FD less food, energy & trade services - Y/Y change||0.9%||0.9%|
A rise for energy prices wasn't enough to lift producer prices, which are continuing to suffer from the global deflationary pull, into the positive column. Producer prices fell 0.1 percent in March for a year-on-year rate that is also at minus 0.1 percent.
Excluding food & energy, prices also fell 0.1 percent with the year-on-year rate at plus 1.0 percent in what is a 2 tenths decline from February's year-on-year rate. When excluding food, energy and trade services, prices were unchanged for a year-on-year rate of plus 0.9 percent which is also unchanged.
Energy prices jumped 1.8 percent for a year-on-year rate of minus 13.8 percent that is 8 tenths better than February. But a very key weakness in the report is a 0.2 percent drop for services which is the first decline for this usually stable reading since October last year. March's dip for services reflects declines for fuels, chemicals, and machinery. Year-on-year, wholesale service prices are up only 1.2 percent.
Oil prices may be on the move higher but their immediate impact on the price picture, based on the wholesale sector, is minimal at best. Inflation remains subdued, justifying the Fed's wait-and-see rate hike policy. Watch for the consumer price report on tomorrow's calendar.
Market Consensus Before Announcement
Helped by gains for oil-related prices, the headline for March's producer prices report is expected to rise 0.3 percent in March after slipping 0.2 percent in February. The core rate is expected to bounce 0.2 percent higher after coming in unchanged in February, a month when service prices were especially soft. Service prices, stalled at a 2.5 percent year-on-year rate, will have to pick up in order to lift overall prices.
The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measure the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.
The PPI measures prices at the producer level before they are passed along to final consumers. 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.
While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.
The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.
The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.
The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers 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.
Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI's lower volatility. Also, the PPI does not include owners' equivalent renta large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the "core PPI" which excludes these two components.
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.