Fri Oct 20 01:00:00 CDT 2017

Consensus Actual Previous
Month over Month 0.1% 0.3% 0.2%
Year over Year 2.9% 3.1% 2.6%

Producer prices were surprisingly firm in September. A 0.3 percent monthly rise was the largest since April and the third increase in as many months. It was also enough to lift the annual PPI inflation rate by 0.5 percentage points to 3.1 percent, a 5-month high.

The monthly headline advance was broad-based with basics up 0.3 percent, capital goods 0.1 percent and consumer goods also 0.1 percent. However, energy (1.0 percent) dominated the increase and excluding this category, the PPI was just 0.1 percent above its August level and 2.6 percent stronger on the year, unchanged from its yearly rate last time.

The underlying trend in producer prices has been essentially flat throughout 2017 to date. Signs of building pressure on capacity have yet to provide any real boost and in the absence of this, core CPI inflation is likely to climb only quite slowly.

The Producer Price Index (PPI) measures the price of industrial and commercial goods produced and sold domestically (excluding turnover tax). About 1,250 types of goods are used to calculate the index and prices are reported by a total of 5,000 enterprises under fixed contractual conditions. 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. These price statistics cover both the sales of industrial products to domestic buyers at different stages in the economic process and the sales between industrial enterprises.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. 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.