Fri Jan 19 01:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.2% 0.2% 0.1%
Year over Year 2.3% 2.3% 2.5%

Producer prices matched expectations in December. A 0.2 percent monthly rise was the sixth increase in as many months but with base effects negative, only enough to see the annual PPI inflation rate ease from 2.5 percent to 2.3 percent, its third consecutive fall and equalling its lowest mark of the year.

In fact, the underlying picture was rather weaker as the monthly headline gain was boosted by a 0.6 percent spurt in energy. Without this effect, prices would have risen just 0.1 percent, reducing the annual core rate from 2.3 percent to 2.1 percent. Elsewhere, basics were up 0.2 percent but both consumer and capital goods were only flat.

The December PPI report shows that pressures from manufacturing on consumer prices are still relatively tame. Having already slowed in November, the annual core rate is now down 0.4 percentage points from its recent October high and that despite booming conditions within the sector. How long this disconnect can continue remains to be seen.

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.