March 31, 2017 04:00 CDT

Actual Previous Revised
Month over Month 0.3% 1.1% 1.2%
Year over Year 3.7% 2.8% 2.9%

Producer prices (ex-construction) rose for a third consecutive month in February. A 0.3 percent monthly increase was the smallest over the period but still enough to raise the annual PPI inflation rate by almost a percentage point to 3.7 percent, its strongest reading in nearly five years.

However, most of the work was done by energy which saw a 0.5 percent monthly gain and without which the headline index would have edged up just 0.1 percent to stand 1.4 percent higher than a year ago. Intermediates advanced 0.4 percent versus January but capital and consumer goods were only flat.

Underlying inflationary pressures in manufacturing remain subdued.

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.