EMU: PPI


Mon Nov 06 05:00:00 CST 2017

Consensus Actual Previous
Month over Month 0.4% 0.6% 0.3%
Year over Year 2.8% 2.9% 2.5%

Highlights
Producer prices (ex-construction) were surprisingly robust in September. A 0.6 percent monthly bounce was the steepest since January and large enough to lift the annual PPI inflation rate by 0.4 percentage points to 2.9 percent, a 4-month high.

However, the underlying picture was much more restrained. Headline strength was dominated by energy where prices jumped 1.5 percent versus August. Without this impact, the PPI was only a tick firmer than in the previous month and, at 2.2 percent, its yearly rate was unchanged. Intermediates were up 0.4 percent on the month and consumer durables 0.2 percent but non-durable consumer goods and basics were just flat.

Regionally, all member states saw monthly increases in headline prices bar Cyprus (minus 1.4 percent). France and Spain (both 0.5 percent) recorded the sharpest gains amongst the big four but Germany (0.4 percent) and Italy (0.3 percent) were not far behind.

Underlying producer prices now have risen at a minimal 0.1 percent monthly rate for three months in a row and, moreover, were only flat in the two months before that. If pipeline pressures are building in goods producing industries, they have yet to reach the level needed to provide any meaningful boost to consumer inflation. The ECB will be taking note.

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.