Mon Dec 04 04:00:00 CST 2017

Consensus Actual Previous Revised
Month over Month 0.3% 0.4% 0.6% 0.5%
Year over Year 2.6% 2.5% 2.9% 2.8%

Producer prices (ex-construction) rose a slightly sharper than expected 0.4 percent on the month in October. This followed a downwardly revised 0.5 percent increase in September and reduced annual PPI inflation from 2.8 percent to 2.5 percent, its first fall since July.

The headline index was boosted significantly by energy where prices spiked a monthly 1.3 percent and without which the PPI would have climbed only 0.2 percent to stand 2.3 percent higher on the year. Intermediates gained 0.3 percent versus September but capital and durable consumer goods were only flat while consumer non-durables declined 0.2 percent.

Regionally, national PPIs posted positive monthly growth in most member states. Amongst the larger four, France saw a 0.2 percent gain as did Germany while Italy was up 0.4 percent and Spain 0.8 percent.

The core Eurozone PPI has now risen for three successive months, suggesting that underlying pipeline inflation pressures are beginning to build. Even so, prices are still only 1.2 percent above their level at the start of 2017 so any meaningful impact on CPI inflation may not be seen for some time.

The Producer Prices Index (PPI) measures the gross trading price of industrial goods sold into the domestic market. 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 covers manufacturing, mining and quarrying and utilities but excludes construction.

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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.