Thu Sep 15 07:30:00 CDT 2016

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.1% -0.2% to 0.2% 0.0% -0.4%
PPI-FD less food & energy - M/M change 0.1% 0.1% to 0.3% 0.1% -0.3%
PPI-FD - Y/Y change 0.0% -0.2%
PPI-FD less food & energy - Y/Y change 1.0% 0.7%
PPI-FD less food, energy & trade services - M/M change 0.3% 0.0%
PPI-FD less food, energy & trade services - Y/Y change 1.2% 0.8%

Producer prices show only limited life in what is still a price-neutral economy. The PPI-FD was unchanged in August which is much better than the 0.4 percent decline in July. Energy prices were down in August excluding which and also food, prices inched 0.1 percent higher.

Final service prices rose 0.1 percent following the prior month's 0.3 percent decline though trade services, which are closely watched as a core reading, fell 0.6 percent. Final goods prices fell 0.4 percent for a second straight month.

But there is progress in trends as year-on-year rates all improved noticeably. Total prices at the wholesale level are unchanged from a year ago with the ex-food and ex-gas reading moving into positive ground at plus 1.0 percent.

This report isn't on fire to say the very least but it could hint at a marginally upward surprise for tomorrow's CPI report but still isn't enough to raise the odds much for a rate hike at next week's FOMC.

Market Consensus Before Announcement
Producer prices did show pressure in both May and June but the gains proved isolated as prices fell sharply in July, down 0.4 percent overall and down 0.3 percent less food & energy. Goods prices, including for finished goods, were weak in July as were both service prices and final service prices which are a special concern.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures 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 rentâ€a 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.