US: PPI-FD


Thu Jan 11 07:30:00 CST 2018

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.2% -0.1% to 0.5% -0.1% 0.4%
PPI-FD less food & energy - M/M change 0.2% 0.1% to 0.3% -0.1% 0.3%
PPI-FD less food, energy & trade services - M/M change 0.2% 0.2% to 0.3% 0.1% 0.4%
PPI-FD - Y/Y change 2.6% 3.1%
PPI-FD less food & energy - Y/Y change 2.3% 2.4%
PPI-FD less food, energy & trade services - Y/Y change 2.3% 2.4%

Highlights
Yesterday's weakness in import and export prices did in fact point to wide weakness in today's producer price report where the headline, at minus 0.1 percent in December, is 3 tenths below Econoday's consensus for the first decline since August 2016. Ex-food and ex-energy is also at minus 0.1 percent and when also excluding trade services, which were very weak, prices came in at plus 0.1 percent. Year-on-year rates, which had been on the rebound, all fell back with total prices down 5 tenths to 2.6 percent.

Service prices are less sensitive to change than commodity prices and December shows wide weakness with the trade services component down a very steep 0.6 percent for the second straight decline and the third in the last four months. Goods prices were unchanged in December with key readings here showing a 0.7 percent decline for food, no change for energy and a 0.3 percent decline for finished goods with light trucks unchanged, cars up 0.2 percent and computers down 0.7 percent.

Down is definitely the theme of this report which points squarely at disappointment for tomorrow's consumer price report where expectations are already soft, at an Econoday consensus gain of only 0.1 percent and 0.2 percent for the core (ex-food and ex-energy). The absence of inflation is a stubborn theme of the economy.

Market Consensus Before Announcement
Consumer inflation has been very subdued but not at the wholesale level, rising 0.4 percent in each of the past three producer price reports that included gains for service prices which are considered an advanced indication of wider pressures ahead. Prices for legal services showed special pressure in November as well as oil, fruits and vegetables and also light trucks. For December, forecasters see the PPI-FD rising a more subdued 0.2 percent, the less food and energy rate also up 0.2 percent, and again up 0.2 percent for less food, energy and trade services.

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.