EMU: PPI


Mon Jun 04 04:00:00 CDT 2018

Consensus Actual Previous Revised
Month over Month 0.2% 0.0% 0.1% 0.1%
Year over Year 2.4% 2.0% 2.1%

Highlights
Producer prices were surprisingly soft in April. Excluding construction, the PPI was only unchanged versus March, the first month not to register positive growth since last July. With March's rise shaded to only 0.1 percent, annual PPI inflation ticked down from 2.1 percent to 2.0 percent.

The lack of any monthly change was due to energy which saw a 0.3 percent drop and without which, prices would have edged 0.1 percent higher. Even so, this still reduced the yearly underlying rate from 1.4 percent to just 1.3 percent, equalling its weakest print since December 2016. Intermediates registered a 0.2 percent gain but all of the other major subsectors were up just 0.1 percent.

Regionally, Germany (0.4 percent) and Spain (0.7 percent) recorded well above average monthly increases but these were essentially offset by falls in France and Italy (both 0.7 percent).

Annual core PPI inflation in the Eurozone has now declined for six consecutive months and current levels suggest minimal help from goods producing industries towards boosting HICP inflation on a sustainable basis. This means that services will have to do most of the work but business surveys here suggest that activity has cooled significantly since the turn of the year. Accordingly, the ECB cannot afford to assume that the stronger than expected (flash) May HICP report is the start of a new trend.

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. The headline index can be very volatile so financial markets look at a core index to better understand underlying trends. This excludes the often highly erratic energy subsector.

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.