Tue Mar 20 02:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.1% -0.1% 0.5%
Year over Year 2.0% 1.8% 2.1%

February producer prices unexpectedly logged their first fall since last May. A 0.1 percent monthly dip put annual PPI inflation at 1.8 percent, a 0.3 percentage point drop from its January outturn and its weakest reading since December 2016.

Headline prices were depressed by energy which recorded a 0.6 percent monthly decline. Elsewhere the news was rather more positive with intermediates up 0.3 percent, durable consumer goods 0.1 percent firmer and capital goods flat. Even so, with consumer non-durables dipping 0.1 percent, the overall PPI less energy was only a tick higher on the month which saw the annual core rate slide from 2.1 percent to 1.9 percent, its first sub-2 percent print in a year.

The February PPI report once again suggests that any increase in underlying pipeline inflation pressures in manufacturing remains limited and surprisingly light for a sector supposedly enjoying boom conditions.

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.