July 28, 2016 08:30 CDT

Actual Previous
Quarter over Quarter 0.1% -0.2%
Year over Year 1.0% 1.2%

Second quarter final demand producer prices edged up 0.1 percent on the quarter mainly due to increases in the prices received for petroleum refining & petroleum fuel manufacturing (13.6 percent), meat & meat product manufacturing (3.7 percent) and building construction (0.4 percent). The gains were partly offset by declines in the prices received for computer & electronic equipment manufacturing (down 3.3 percent), specialized machinery & equipment manufacturing (down 3.8 percent) and fruit and vegetable processing (down 5.4 percent). On the year, prices were up 1.0 percent.

The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers.

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 consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer. Unlike most other countries, Australia calculates its PPI on a quarterly basis.

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 they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

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.