March 7, 2017 03:00 CST

Actual Previous
Month over Month 1.1% 0.6%
Year over Year 2.8% 0.9%

Producer prices rose for a second consecutive month in January. A 1.1 percent increase versus December followed that month's unrevised 0.6 percent gain and was the sharpest since last July. As a result, the annual PPI inflation rate climbed from 0.9 percent to 2.8 percent, equalling its highest reading since October 2012.

January's monthly spurt was once again largely due to higher energy charges, up some 2.6 percent to stand 6.2 percent higher on the year. However, there were significant rises elsewhere too with intermediates up 0.5 percent and consumer goods 0.3 percent. Capital goods edged just 0.1 percent firmer. Consequently, excluding energy the PPI advanced 0.4 percent versus December and 1.1 percent from a year ago after a 0.8 percent annual increase last time.

Producer prices are now 3.3 percent above their February 2016 low but still some 7.6 percent short of their August 2012 peak. If the sector PMI results are to be believed, rapidly spiralling input costs also forced manufacturers to hike their output prices again in February ostensibly at the fastest rate since June 2011. However, margins continue to be squeezed and without some improvement in domestic demand, more of the same is to be expected over coming months.

The producer price indices (PPI) measure transaction prices, exclusive of VAT, for goods from industrial activities sold on the Italian market. Construction is excluded. 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 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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction.

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 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.