GB: Producer Price Index

Tue Dec 12 03:30:00 CST 2017

Consensus Actual Previous Revised
Output-M/M 0.4% 0.3% 0.2%
Output-Y/Y 3.0% 3.0% 2.8%
Input-M/M 1.5% 1.8% 1.0%
Input-Y/Y 6.7% 7.3% 4.6% 4.8%

November factory gate prices were up a slightly smaller than expected 0.3 percent on the month in November. Even so, this was enough to raise the annual inflation rate a couple of ticks to 3.0 percent, its first increase since August but still 0.3 percentage points short of its September print.

In terms of the monthly change, the main boost came from petroleum products where charges climbed 1.3 percent and chemicals and pharmaceuticals (0.5 percent). Elsewhere, prices were much more subdued and the core index was up 0.2 percent, adding just a tick to its yearly rate which now stands at 2.2 percent.

Meantime, input costs were up another sizeable 1.8 percent versus October to lift their yearly rate from 4.8 percent to 7.3 percent. On the month, crude oil (7.6 percent) alone added 1.2 percentage points to the overall change and fuel (2.5 percent) accounted for much of the rest. Imported food materials (1.0 percent) also had a positive impact while the only fall was in other imported materials (0.2 percent).

The November PPIs show that there is still inflationary pressure in the pipeline. However, annual core output price inflation remains comfortably short of its recent 2.9 percent high (June) and the signs are that the worst of the pound's Brexit referendum-inspired slide is over. That said, the BoE MPC's inflation hawks will still watching developments especially closely.

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.