|M/M % change||0.2%||0.1%||0.4%|
|Y/Y % change||-1.0%||-1.0%||-1.2%|
The combined producer and import price index edged 0.1 percent higher on the month in June. This was its third consecutive increase but not enough to reduce the annual deflation rate which held steady at 1.0 percent.
In fact, overall prices only rose due to the strength of import charges which were 0.8 percent higher than in mid-quarter on the back of a 10.8 percent bounce in petrol costs. By contrast, domestic producer prices dipped 0.2 percent. That said, within the PPI weakness was concentrated in garbage collection which saw a 19.0 percent monthly slump. Petrol prices jumped 8.8 percent but otherwise most other subsectors were little changed and the core PPI was flat at its May level and 0.6 percent lower on the year.
For the combined index, underlying prices matched the 0.1 percent monthly headline increase but, at minus 0.4 percent, their yearly change was a tick stronger than in May. The pick-up in the annual core rate in recent months is welcome but largely reflects favourable base effects. Underlying trends remain soft.
The headline composite index combines domestic producer prices and import prices into a single measure. This can be volatile and financial markets will normally look at the core index for a more reliable guide to underlying developments.
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. Producer prices are more volatile than consumer prices. 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. 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.
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