EMU: PPI


Fri Nov 04 05:00:00 CDT 2016

Consensus Actual Previous Revised
Month over Month 0.0% 0.1% -0.2%
Year over Year -1.8% -1.5% -2.1% -1.9%

Highlights
Eurozone producer prices were a little firmer than expected in September. Following an unrevised 0.2 percent monthly drop in August, the headline index (excluding construction) edged up 0.1 percent, its fourth increase since April. Annual PPI inflation now stands at minus 1.5 percent, up from minus 2.1 percent in mid-quarter and its strongest reading since October 2014.

Prices in general were relatively stable with just energy (0.2 percent) registering a monthly change in excess of 0.1 percent. As a result, core prices were also only 0.1 percent higher than in August and this made for a minus 0.3 percent annual underlying rate, a 0.4 percentage point rise versus last time. Intermediates and capital goods were flat on the month and consumer durable and non-durable goods up 0.1 percent.

Volatility across the region was more marked with the Netherlands recording a 2.0 percent monthly spike and Belgium a 1.5 percent jump. However, the larger countries were all subdued with France and Spain 0.1 percent and 0.3 percent firmer respectively and Germany and Italy down 0.2 percent and 0.1 percent.

Core Eurozone producer prices are beginning to move up but the trajectory remains shallow and, in itself, unlikely to provide any significant lift to consumer prices. A sustained strong period of activity in the manufacturing sector is needed for that and the performance here is still quite sluggish.

Definition
The Producer Prices Index (PPI) measures the gross trading price of industrial goods sold into the domestic market. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer and, in contrast to the consumer price index (CPI), excludes VAT and other deductible taxed associated with turnover. The PPI covers manufacturing, mining and quarrying and utilities but excludes construction.

Description
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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.