EMU: PPI


Thu Apr 05 04:00:00 CDT 2018

Consensus Actual Previous Revised
Month over Month 0.0% 0.1% 0.4%
Year over Year 1.5% 1.6% 1.5% 1.6%

Highlights
Producer prices (ex-construction) edged 0.1 percent higher on the month in February. This was their seventh consecutive increase but still only enough to leave annual PPI inflation unchanged from January's lowly 1.6 percent.

In fact, a slightly firmer 0.2 percent monthly rise in the ex-energy index saw its yearly rate slip a tick to 1.6 percent, its fourth successive decline and its lowest outturn since January 2017. Intermediates (0.3 percent) posted the only monthly gain of note as capital goods (0.1 percent) matched the meagre headline rise while consumer durables and non-durables were just flat. Energy dipped 0.2 percent.

The February PPI report leaves intact a weak underlying trend in pipeline price pressures that points to little near-term support from manufacturing to Eurozone HICP inflation.

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.