GB: Producer Price Index

January 17, 2017 03:30 CST

Consensus Actual Previous Revised
Output-M/M 0.4% 0.1% 0.0% 0.1%
Output-Y/Y 2.9% 2.7% 2.3% 2.4%
Input-M/M 2.4% 1.8% -1.1% -0.6%
Input-Y/Y 15.9% 15.8% 12.9% 13.3%

Having seen CPI inflation accelerate significantly more sharply than expected in December (see today's calendar entry), the new PPI update should come as something of a relief to UK financial markets and monetary authorities alike.

in particular, factory gate prices were up a surprisingly small 0.1 percent versus November, their second successive month at this rate. Even so, positive base effects saw the annual rise jump from 2.4 percent to 2.7 percent, the highest print since March 2012. That said, with petroleum adding 0.1 percentage points to the overall monthly change and most other categories having only a minimal impact, the core index was very well behaved. A flat performance on the month here saw the annual underlying rate actually drop a couple of ticks to 2.1 percent.

Meantime, input costs surged 1.8 percent versus November, a hefty spike but also still short of market expectations. Nonetheless, this was enough to raise annual input cost inflation by some 1.5 percentage points to a heady 15.8 percent, its strongest reading since September 2011. Not unexpectedly, imports did most of the damage and charges for overseas materials saw their largest 12-month increase since July 2011. Notably, crude oil costs were up nearly 57 percent, almost a 7-year peak.

While hardly likely to put a smile on the face of the BoE MPC, the bottom line is that pipeline price pressures in UK manufacturing could have been a lot worse last month. That said, if economic activity in general continues to outperform expectations, rising costs here are all the more likely to feed through into consumer prices sooner than later. Speculation about a possible monetary tightening in 2017 is likely to become increasingly widespread over coming months.

The Producer Price Index (PPI) measures the prices of goods bought and sold by manufacturers. The input price index measure the prices of materials and fuels purchased by manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running. The output price index captures prices charged by manufacturers as they pass through the factory gate and excludes any VAT or similar deductible tax. Both measures may be seen as leading indicators of consumer price index (CPI) inflation although the short-term correlation is only very weak.

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 (VAT) or similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The output price indexes measure change in manufacturer' goods prices produced and often are referred to as factory gate prices. Input prices are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day operations.

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.

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.