May 30, 2017 03:00 CDT

Actual Previous Revised
Month over Month 0.1% -0.1% -0.2%
Year over Year 4.4% 3.4% 3.3%

Producer prices edged up 0.1 percent on the month in April, their fourth increase in the last five months. Supported by positive base effects, annual PPI inflation climbed more than a full percentage point to 4.4 percent, equalling its highest print in five years.

Headline prices were boosted by a 0.2 percent monthly increase in consumer goods and to a lesser extent by a 0.1 percent gain in both capital goods and intermediates. Energy charges were down 0.1 percent and had no significant impact on the headline change. Hence, excluding this sector, prices still rose 0.1 percent versus March and were 2.0 percent higher than in April 2016.

Producer prices have been trending higher since April last year, helped in no small way by oil effects. More importantly, core prices have been climbing too, albeit nothing like as sharply. However, a sustainable upswing here must remain questionable until growth of domestic demand starts to pick up more meaningfully and, as Thursday's first quarter national accounts will probably indicate, there has been little sign of that so far.

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.