GB: Producer Price Index

Tue Feb 13 03:30:00 CST 2018

Consensus Actual Previous Revised
Output-M/M 0.2% 0.1% 0.4%
Output-Y/Y 3.0% 2.8% 3.3%
Input-M/M 0.5% 0.7% 0.1% 0.6%
Input-Y/Y 4.1% 4.7% 4.9% 5.4%

Factory gate prices were up a smaller than expected 0.1 percent on the month in January. This was their seventh successive advance but also the smallest of the sequence and soft enough to reduce annual inflation from 3.3 percent to 2.8 percent.

The minor monthly gain was mainly due to petroleum products (1.3 percent) alongside paper and printing (0.6 percent) and chemical and pharmaceuticals (also 0.6 percent). Food (minus 0.3 percent) saw the steepest decline. As a result, the core output price index gained 0.3 percent from December and was 2.3 percent higher on the year, a tick short of its annual rate last time.

Meantime, raw material costs were up 0.7 percent versus December which saw their yearly rate drop 0.7 percentage points to 4.7 percent, its lowest mark since July 2016. In large part this reflects the diminishing impact of the pound's depreciation as annual imported inflation was only 3.5 percent, a near-17 percentage point decline versus a year ago. Indeed, sterling's trade weighted index in January was 2.6 percent above its year ago level. On the month, the main boost to costs came from crude oil (4.9 percent) although this was partially offset by weaker imported food (minus 3.1 percent).

The PPIs are well enough behaved to suggest that pipeline inflation pressures in goods producing industries are not building significantly. This will not stop the BoE tightening again soon, but gradual and limited rate hikes still look the most likely scenario.

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.