Fri May 18 01:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.3% 0.5% 0.1%
Year over Year 1.8% 2.0% 1.9%

Producer prices were up a surprisingly sharp 0.5 percent on the month in April, equalling their steepest increase since January 2017. Following a 0.1 percent rise in March, this put the annual PPI inflation rate at 2.0 percent, a tick firmer than in March and a 3-month peak.

The overall monthly gain was led by energy where charges spiked 1.2 percent and excluding which the PPI would have increased a much more modest 0.2 percent. Consequently, prices elsewhere were rather more stable with capital and consumer goods both edging up just 0.l percent and intermediates gaining 0.2 percent.

Annual core PPI inflation dipped a tick to 1.6 percent in April, its third decline in as many months and more than a full percentage point short of its recent high in October last year. With manufacturing activity having slowed significantly since late 2017, pipeline inflation pressures appear to have eased in tandem. Without a rebound in growth, manufacturing looks unlikely to provide consumer prices much of a lift over coming months.

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.