GB: Producer Price Index

Tue Mar 20 04:30:00 CDT 2018

Consensus Actual Previous Revised
Output-M/M 0.1% 0.0% 0.1%
Output-Y/Y 2.7% 2.6% 2.8%
Input-M/M -0.9% -1.1% 0.7% 0.4%
Input-Y/Y 3.8% 3.4% 4.7% 4.5%

Factory gate prices were unchanged on the month in February. The outturn, which was on the soft side of expectations, put the annual rate at 2.6 percent, a 0.2 percentage point decline versus its unrevised January mark.

The main downward impact on the month came from petroleum products which saw a 1.4 percent decline. Most other categories were much less volatile although chemical and pharmaceuticals increased a relatively sharp 0.6 percent. The core index gained a monthly 0.2 percent, nudging its yearly rate a tick firmer to 2.4 percent but still in line with a broadly flat growth trend seen since last October.

Meantime, raw material and fuel costs were weak, falling 1.1 percent versus January for an annual increase of 3.4 percent, a (second successive) 1.1 percentage point drop versus the start of the year. Yearly cost inflation has now decelerated in four of the last five months and the February outturn was nearly 16 percentage points short of its mark in the same month of 2017. In large part the slide reflects the diminishing effects of sterling's Brexit-referendum inspired slump indeed, the currency's effective exchange rate has appreciated every month since September.

The February PPI report should go down quite well at the BoE, particularly after today's favourable CPI report (see calendar entry). Even so, underlying factory gate prices are still rising at a fast enough rate to suggest that any increase in demand growth could put added upside pressure on pipeline charges. A May tightening is still probable unless upcoming inflation news is significantly weaker than expected.

Note that from next month publication of the PPIs will move from Tuesday to Wednesday.

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.