GB: Producer Price Index

Tue Oct 17 03:30:00 CDT 2017

Consensus Actual Previous Revised
Output-M/M 0.2% 0.2% 0.4%
Output-Y/Y 3.3% 3.3% 3.4%
Input-M/M 1.2% 0.4% 1.6% 2.3%
Input-Y/Y 8.2% 8.4% 7.6% 8.4%

Factory gate prices were up 0.2 percent on the month in September, matching market expectations. This put the annual inflation rate at 3.3 percent, down just a tick from last time.

The monthly increase essentially reflected a 2.4 percent spurt in petroleum products. Elsewhere, volatility was very low with monthly moves of between minus 0.2 percent and 0.2 percent. As a result, the core output price index was only flat on the month which in turn left its yearly rate steady at 2.5 percent.

Meantime, manufacturers' raw material and fuel costs were up a surprisingly small 0.4 percent versus August although the previous month's gain was revised sharply higher to 2.3 percent. Annual input cost inflation was unchanged at 8.4 percent. The main boosts to the monthly change came from crude oil, where prices spiked 4.7 percent, and imported metals, which gained 1.3 percent. Apart from fuel (1.8 percent), all the other categories posted declines.

The September PPIs are relatively unexciting. While showing no deterioration in the underlying picture, they leave intact sufficiently strong pipeline inflation pressures to keep the BoE MPC's hawks less than happy.

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.