|PPI-FD - M/M change||0.0%||-0.2% to 0.1%||-0.1%||0.3%|
|PPI-FD less food & energy - M/M change||0.2%||0.1% to 0.4%||0.0%||0.3%|
|PPI-FD less food, energy & trade services - M/M change||0.2%||0.2% to 0.3%||0.1%||0.3%|
|PPI-FD - Y/Y change||2.3%||2.2%|
|PPI-FD less food & energy - Y/Y change||1.6%||1.5%|
|PPI-FD less food, energy & trade services - Y/Y change||1.7%||1.8%|
Inflation at the wholesale level is more subdued than expected, falling 0.1 percent in March vs Econoday's consensus for no change. When excluding food and also oil which fell sharply in March, prices were unchanged vs expectations for a 0.2 percent increase.
Softness is spread throughout the report with both goods and services coming in at minus 0.2 percent. Two factors that did move went in opposite directions with food up 0.9 percent in the month and energy down 2.9 percent.
Year-on-year rates edged higher but reflect, not current pressure, but easy comparisons with very low levels this time last year. Still, the overall rate came in at 2.3 percent for the highest reading in 5 years.
The lack of pressure in services points to a general lack of price traction consistent with sluggish demand. Today's report may lower expectations for tomorrow's consumer price report where, like this report, a no change headline is the consensus with the ex-food and energy reading seen at plus 0.2 percent.
Market Consensus Before Announcement
Higher energy was a main factor in February's 0.3 percent increase in producer prices with lower energy pointing to a flat March. Service prices were also a main factor in the February increase and a second month of pressure here could raise expectations for pass through to consumer prices. Forecaster see the PPI-FD headline for March unchanged with less energy and food seen at plus 0.2 percent. When excluding food, energy & trade services, the Econoday consensus gain is also 0.2 percent. Like the CPI and PCE price indexes, the year-on-year rate for the PPI-FD is at a 5-year high, at 2.2 percent in February.
The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.
The PPI measures prices at the producer level before they are passed along to final consumers. 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.
While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.
The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.
The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.
The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers 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.
Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPIâ€™s lower volatility. Also, the PPI does not include ownersâ€™ equivalent rentâ€a large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the "core PPI" which excludes these two components.
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.