Tue Mar 14 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.1% -0.1% to 0.3% 0.3% 0.6%
PPI-FD less food & energy - M/M change 0.2% 0.0% to 0.3% 0.3% 0.4%
PPI-FD less food, energy & trade services - M/M change 0.2% 0.2% to 0.3% 0.3% 0.2%
PPI-FD - Y/Y change 2.2% 1.6%
PPI-FD less food & energy - Y/Y change 1.5% 1.2%
PPI-FD less food, energy & trade services - Y/Y change 1.8% 1.6%

Producer prices show significantly more pressure than expected in February, at a 0.3 percent headline with the two main groupings -- less food & energy and less food, energy & trade services -- also rising 0.3 percent. Year-on-year, overall producer prices are up 2.2 percent for the hottest rate in nearly 5 years.

Energy, as it has been in recent months, is a main source of pressure, rising 0.6 percent in February with easy comparisons against low levels last year a main reason for the year-on-year acceleration. Goods prices in total rose 0.3 percent in the month. Services also show pressure, up 0.4 percent and reflecting special pressure for traveler accommodation.

Headlines at 0.3 percent may not sound like much but they are for this report, one that lifts the chances for higher-than-expected readings in tomorrow's consumer price report and underscores the reality that inflation, even without acceleration in wages, is on the rise, a fact that will not escape Federal Reserve policy makers who are meeting this week. Note that heavy weather in Washington briefly delayed the release of this morning's report.

Market Consensus Before Announcement
Producer prices in January correctly signaled what proved to be outsized gains for consumer prices during the month. Forecaster see the PPI-FD headline for February rising but only a slight 0.1 percent, down from January's 0.6 percent jump and reflecting the month's decline in energy costs. When excluding energy as well as food, prices are expected to rise 0.2 percent from 0.4 percent. No moderation is expected for trade services which with the February consensus excluding food, energy & trade services seen rising 0.2 percent as they did in January.

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.