Mon Jan 29 04:00:00 CST 2018

Actual Previous
Month over Month 0.0% 0.4%
Year over Year 2.2% 2.8%

Producer prices were unchanged in December following an unrevised 0.4 percent monthly rise in November. This was only the second time in the last five months that prices have not increased and the soft year-end reading saw annual PPI inflation decline from 2.8 percent to 2.2 percent, its first fall since last June and its weakest reading since September.

Most of the major basket components showed little monthly volatility, the sharpest move being energy (minus 0.2 percent). In fact, apart from consumer goods (0.1 percent) all of the other categories were only flat. Excluding energy, the PPI was up just 0.1 percent versus mid-quarter and 1.8 percent higher on the year, a 0.2 percentage point drop versus its November rate.

According to the sector PMI, December manufacturing activity expanded at its slowest rate in three months. Pipeline inflation pressures remain subdued and economic growth in general will need to accelerate if underlying consumer prices are to pick up significantly any time soon.

The producer price indices (PPI) measure transaction prices, exclusive of VAT, for goods from industrial activities sold on the Italian market. Construction is excluded. 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.

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 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.