Thu May 03 04:00:00 CDT 2018

Consensus Actual Previous Revised
Month over Month 0.1% 0.1% 0.1% 0.0%
Year over Year 2.1% 2.1% 1.6%

Producer prices (ex-construction) rose a monthly 0.1 percent in March, in line with market expectations. With base effects quite strongly positive, this was enough to lift annual PPI inflation from 1.6 percent to 2.1 percent, a 3-month high.

Volatility amongst the main basket components was limited. Energy prices dipped a monthly 0.1 percent which left the core PPI matching the headline 0.1 percent rise. However, at 1.4 percent, annual underlying inflation was down a couple of ticks from last time and equalled its softest print since December 2016. Elsewhere, durable and non-durable consumer goods saw a 0.2 percent monthly gain as did intermediates. Capital goods were up just 0.1 percent.

Today's pipeline inflation update reaffirms a still largely benign picture in Eurozone manufacturing. In particular, a fifth consecutive fall in the annual core rate suggests that, in the absence of a sharp pick-up in business activity, the sector is unlikely to provide any real boost to Eurozone HICP inflation for some time.

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 headline index can be very volatile so financial markets look at a core index to better understand underlying trends. This excludes the often highly erratic energy subsector.

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.