Fri Feb 02 04:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.3% 0.2% 0.6%
Year over Year 2.3% 2.2% 2.8%

Producer prices (ex-construction) rose again in December. However, a 0.2 percent monthly advance was the smallest in a run of five consecutive increases and on the soft side of market expectations. Moreover, with prices significantly firmer a year ago, annual PPI inflation fell from 2.8 percent to 2.2 percent, its lowest mark since last July.

Amongst the basket components, prices were fairly soft across the board. Intermediates matched the headline monthly gain but capital and durable consumer goods were up just 0.1 percent and consumer non-durables flat. Energy also posted a meagre 0.1 percent rise, a rate matched by the core index for which annual growth fell 0.2 percentage points to 1.9 percent, its weakest print since January 2017.

Regionally, outside of Ireland (0.7 percent) and Lithuania (minus 0.6 percent), most states saw little change in national PPIs. Annual growth rates are still positive across the board but since September, France has fallen 0.9 percentage points, Germany 0.7 percentage points and Spain 1.8 percentage points. Amongst the big four countries, only Italy has posted an increase (2.2 percent from 1.7 percent).

The January Eurozone PPI should worry the ECB. Underlying prices are showing no sign of acceleration despite historically high levels of manufacturing activity. Recent business surveys have been much more bullish so it may be that a pick-up is just around the corner. However, on the basis of these data, any significant boost to HICP inflation from the goods producing sector remains a 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.