Wed May 09 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous
PPI-FD - M/M change 0.3% 0.2% to 0.5% 0.1% 0.3%
PPI-FD less food & energy - M/M change 0.2% 0.1% to 0.3% 0.2% 0.3%
PPI-FD less food, energy & trade services - M/M change 0.3% 0.2% to 0.4% 0.1% 0.4%
PPI-FD - Y/Y change 2.6% 3.0%
PPI-FD less food & energy - Y/Y change 2.3% 2.7%
PPI-FD less food, energy & trade services - Y/Y change 2.5% 2.9%

Prices are up for steel and aluminum but overall wholesale prices proved subdued in April. The headline increase of only 0.1 percent is 2 tenths below Econoday's consensus and 1 tenth below the low estimate. When excluding food, where prices fell 1.1 percent, and also energy, which inched only 0.1 percent higher, producer prices did manage an as-expected 0.2 percent increase. When excluding food and energy and also a 0.2 percent gain for trade services, the result is only plus 0.1 percent which, like the headline, is below the low estimate.

Steel products rose a steep 3.2 percent in April vs a 1.9 percent rise in March when tariffs were first imposed, with aluminum up 1.8 percent in April after a 1.4 percent rise in March. Year-on-year rates are very elevated: up 7.4 percent for steel and 11.9 percent for aluminum.

Yet overall year-on-year rates are not elevated at all in fact are slipping, down 4 tenths overall to 2.6 percent for the headline. The two core readings also shed 4 tenths each, to 2.3 percent for ex-food ex-energy and 2.5 percent when also excluding trade services.

Other readings include no monthly change for cars and a 0.1 percent decline for light trucks. Cigarette costs spiked at the wholesale level, up 3.2 percent on the month. Another outsized increase is in construction costs, up 1.1 percent which could indirectly reflect tariff effects and related scarcity of building materials.

Personal consumption measures, which offer hints at the next set of PCE price data, are very subdued, down 0.1 percent overall and also for ex-food ex-energy following only 0.1 percent rises for both in March. Year-on-year rates are at 2.8 percent overall and 2.1 percent ex-food ex-energy which are down 6 and 7 tenths respectively from March in results that do not point to a repeat of March's big spikes in the PCE yearly rates.

Tariffs may be adding some pressure at the base of the wholesale price pipeline, but there's no evidence of it moving higher. For a Federal Reserve that is increasingly conscious of an upward risk to inflation, today's results do not raise many alarms. Watch tomorrow for consumer prices where only limited incremental upward pressure is the call.

Market Consensus Before Announcement
Moderate inflation has been the trend for producer prices and moderate increases are the forecasts for April: at 0.3 percent for headline PPI-FD, at 0.2 percent excluding food and energy, and at 0.3 percent when excluding food, energy and trade services. Steel prices did show tariff effects in this report in March and further pressure would be closely noted.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.

The PPI measures prices at the producer level before they are passed along to final consumers. 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.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers 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.

Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI’s lower volatility. Also, the PPI does not include owners’ equivalent rentâ€a large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the "core PPI" which excludes these two components.

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.