Fri Nov 18 01:00:00 CST 2016

Consensus Actual Previous
Month over Month 0.2% 0.7% -0.2%
Year over Year -0.9% -0.4% -1.4%

Producer prices were surprisingly robust in October. A 0.7 percent monthly rise in the headline index was the first gain since July, much stronger than the market consensus and easily the steepest increase recorded so far in 2016. As a result, annual PPI inflation jumped a full percentage point to minus 0.4 percent.

However, while consumer goods were up 0.3 percent on the month, capital goods were only flat and basics fell 0.1 percent. Once again it was energy (2.3 percent) that provided by far the largest boost to the overall monthly change and excluding this subsector, the PPI was just 0.1 percent above its September level and 0.3 percent higher than a year ago, albeit after a 0.1 percent annual decline last time.

Still, underlying producer prices are moving in the right direction, consistent with signs of tightening product markets and capacity issues in some industries. This should help to raise consumer prices further down the road but a sustained upswing in household demand will be required for any inflationary gains to stick and recent developments here have been disappointingly soft.

The Producer Price Index (PPI) measures the price of industrial and commercial goods produced and sold domestically (excluding turnover tax). About 1,250 types of goods are used to calculate the index and prices are reported by a total of 5,000 enterprises under fixed contractual conditions. 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 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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction. These price statistics cover both the sales of industrial products to domestic buyers at different stages in the economic process and the sales between industrial enterprises.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. 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.