Both manufacturers' input costs and factory gate prices rose again in March. The former recorded a sizeable 2.0 percent monthly increase which lifted their yearly change from minus 8.2 percent to minus 6.5 percent. More importantly, output prices were 0.3 percent higher than in February and now stand 0.9 percent below their level in March 2015, up from a minus 1.1 percent annual rate last time. Both measures were broadly in line with expectations.
Factory gate prices were boosted by a monthly 2.8 percent jump in petroleum products which alone added nearly 0.2 percentage points to the headline rise. Elsewhere prices were relatively becalmed and, outside of computer, electrical and optical products (minus 0.3 percent), all of the main subsectors recorded increases of between 0.1 percent and 0.3 percent. The core index edged just 0.1 percent firmer versus February and, at 0.2 percent, its annual rate was similarly only a tick higher than last time.
More expensive energy was similarly the key driving force behind the monthly spike in input costs. Hence crude oil surged some 15.7 percent on the month, adding about 1.6 percentage points to the overall change. Imported metals (4.1 percent) accounted for much of the remainder although most other categories also posted small advances.
The bounce in the March PPIs will relieve a little downward pressure on consumer prices but more generally the underlying trends in both measures suggest that the manufacturing sector will continue to act as a drag for some time yet.
The PPI measures prices at the producer level before they are passed along to consumers. The two major components are input prices - that is those paid by producers for things like raw materials - and output or factory gate prices. Output prices measure the prices producers are able to charge for the goods they produce.
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). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax (VAT) or similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer.
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 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.