US: PPI-FD


Thu May 11 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.2% -0.2% to 0.3% 0.5% -0.1%
PPI-FD less food & energy - M/M change 0.2% 0.2% to 0.2% 0.4% 0.0%
PPI-FD less food, energy & trade services - M/M change 0.2% 0.2% to 0.3% 0.7% 0.1%
PPI-FD - Y/Y change 2.5% 2.3%
PPI-FD less food & energy - Y/Y change 1.9% 1.6%
PPI-FD less food, energy & trade services - Y/Y change 2.1% 1.7%

Highlights
March was an unusually weak month for inflation and April, after yesterday's import & export price report followed by today's producer price report, is shaping up to prove an unusually strong month. Producer prices rose 0.5 percent to easily exceed Econoday's high-side forecast for only 0.3 percent. Excluding food & energy, producer prices rose 0.4 percent which again is 2 tenths above the high estimate, topped off by less food, energy & trade services which jumped 0.7 percent which beats the high estimate by 4 tenths.

Gains for computers (up 1.1 percent) and cigarettes (up 2.2 percent) were major factors in the month as were guest rooms, up a monthly 8.2 percent and reflecting holiday demand tied to the late Easter. This increase is oversized and raises questions whether this year's Easter shift, from March last year to April this year, was accurately offset by the report's seasonal and calendar adjustments.

A rise in short-term interest rates following the Fed's rate hike in March is also a factor in the report, raising prices for securities brokerages and loan services. A special negative in the report is a 0.3 percent decline in trade services which follows March's 0.1 percent dip. Weakness in trade services hints at stubborn weakness in general demand and points, perhaps, to a swing lower for this report in May.

Because of the size of the monthly swings and questions surrounding Easter, March and April will have to be taken together when assessing inflation data, as it is when assessing retail sales for the two months. Today's report points to another set of upside surprises in tomorrow's consumer price report.

Market Consensus Before Announcement
The producer price report in March, like import & export prices before it and consumer and PCE prices after, was unexpectedly weak, the result at least in part of the month's decline in oil prices. But service prices at the producer level were also weak as they also proved to be at the consumer level. Lack of price pressure does point to lack of demand though April's better showing for oil is pointing to a rebound for the PPI-FD headline, at a consensus gain of 0.2 percent vs March's 0.1 percent decline. Less food & energy is also expected to rise 0.2 percent with the less food, energy & trade reading also at a 0.2 percent consensus.

Definition
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.





Description
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.