Mon Nov 20 01:00:00 CST 2017

Consensus Actual Previous
Month over Month 0.3% 0.3% 0.3%
Year over Year 2.7% 2.7% 3.1%

Producer prices again rose 0.3 percent on the month in October. The increase, which matched market expectations, was the fourth in a row but, with base effects quite strongly negative, still saw the annual headline PPI inflation rate drop 0.4 percentage points to 2.7 percent.

Energy prices were 0.5 percent firmer versus September and without this effect, the PPI would have increased a monthly 0.2 percent. In turn, this would have lifted the underlying yearly inflation rate by a tick to 2.7 percent. Compared with the previous month, intermediates gained 0.4 percent but capital goods were only flat and consumer goods fell 0.2 percent on the back of a 0.3 percent decline in non-durables.

The uptick in the annual underlying PPI rate leaves it just 0.3 percentage above its mark at the start of 2017. Pipeline inflation pressures in Germany would seem to be on the up but their impact on actual prices continues to feed through only 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.