Fri Jan 05 04:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.3% 0.6% 0.4%
Year over Year 2.5% 2.8% 2.5%

Producer prices (ex-construction) rose for a fourth straight month in November. A 0.6 percent monthly gain was significantly stronger than expected and lifted annual PPI inflation by 0.3 percentage points to 2.8 percent. This reversed all of October's decline.

A 2.3 percent monthly bounce in energy essentially accounted for the entire increase in the headline index. Without the boost here, the PPI would have been unchanged at its October level and only 2.1 percent firmer on the year, down from 2.3 percent last time. Intermediates advanced 0.2 percent on the month and capital goods were 0.1 percent higher but durable consumer goods were just flat and non-durables fell 0.2 percent, their second decline in a row.

Underlying producer prices remain sluggish, averaging less than a 0.1 percent monthly rise over the last six months. In fact, the core index has only increased twice since last April. Manufacturing should be enjoying near-boom conditions if the latest PMI surveys are anything to go by but any meaningful boost from the sector to CPI inflation still looks some way off.

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.