EMU: PPI


Tue Oct 03 04:00:00 CDT 2017

Consensus Actual Previous
Month over Month 0.1% 0.3% 0.0%
Year over Year 2.3% 2.5% 2.0%

Highlights
Producer prices (ex-construction) managed only their second rise of the year so far in September. A 0.3 percent monthly increase was larger than expected and lifted annual PPI inflation by 0.5 percentage points to 2.5 percent, a 3-month high.

Excluding energy, the trend has been more positive for some while. Even so, the September core index edged just 0.1 percent above its August level for a 2.2 percent yearly rate, up only a tick on last time. Accordingly, the dominant factor in the headline monthly gain was energy where prices climbed 0.7 percent. Elsewhere, developments were much more subdued with intermediates up 0.2 percent durable and non-durable consumer goods 0.1 percent firmer and capital goods flat.

France (0.4 percent), Germany (0.2 percent) and Italy (0.5 percent) all registered fresh monthly advances but Spain was unchanged.

The average monthly increase in underlying Eurozone producer prices since the start of the year has been less than 0.2 percent. Indeed, it would be closer to 0.1 percent but for the impact of a 0.5 percent increase in January. The sluggish progress here will not be wasted on the ECB and while it should not prevent a recalibration of monetary policy later this month, it argues in favour of only cautious tapering.

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.