EMU: PPI


Fri Mar 02 04:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.4% 0.4% 0.2%
Year over Year 1.6% 1.5% 2.2%

Highlights
Producer prices (ex-construction) rose for a sixth consecutive month in January. A 0.4 percent monthly gain was in line with expectations and, with base effects negative, small enough to see annual PPI inflation drop from 2.2 percent to 1.5 percent, its lowest reading since November 2016.

With the exception of non-durable consumer goods (minus 0.1 percent), all of the major subsectors posted monthly gains. Intermediates (0.6 percent) saw the sharpest increase but capital goods and consumer durables (both 0.4 percent) were not far behind. Energy charges were up a more modest 0.3 percent which left the PPI excluding this category posting a 0.5 percent advance, matching its steepest rise since 2011.

Regionally, national PPIs moved higher in all reporting member states bar Ireland (-0.4 percent) and all, with the exception of Cyprus (minus 0.4 percent) and Luxembourg (minus 3.7 percent), show positive annual rates.

The buoyancy of the January core PPI could indicate that pipeline Eurozone inflation pressures from goods producing industries are finally starting to gather some steam. However, it will need to be sustained if it is to have any real impact on consumer prices. To this end, the February data should now be viewed with more than the usual level of interest.

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.