GB: Producer Price Index

Wed Jun 13 03:30:00 CDT 2018

Consensus Actual Previous Revised
Output-M/M 0.3% 0.4% 0.3% 0.4%
Output-Y/Y 3.0% 2.9% 2.7% 2.5%
Input-M/M 2.0% 2.8% 0.4% 0.6%
Input-Y/Y 8.0% 9.2% 5.3% 5.6%

Overall producer prices were firmer than expected in May. Factory gate charges were up 0.4 percent on the month which, with base effects quite positive, was enough to lift the annual inflation rate by 0.4 percentage points to 2.9 percent, its highest posting so far in 2018 but still well short of the rates seen throughout 2017.

In fact, the monthly gain was anyway largely attributable to petroleum products which saw a 4.3 percent surge. Paper and printing alongside other manufactured products saw a 0.5 percent bounce but elsewhere prices were quite subdued. Consequently, the core output price index advanced only 0.2 percent for a 2.1 percent yearly rise, just a tick above April's downwardly revised mark.

Meantime, a sharp jump in oil lay behind a 2.8 percent monthly spurt in the cost raw materials and fuel. This lifted their annual growth rate from by fully 3.6 percentage points to 9.2 percent, the strongest reading since June last year. Crude oil was up 10.4 percent on the month, with base prices given an extra boost by a weaker pound. Imported metals (3.6 percent), imported parts and equipment (2.1 percent) and imported food (1.1 percent) were similarly lifted by the pound's decline.

Following news of a reasonably subdued May CPI (see today's calendar entry), the mid-quarter PPI update suggests that at least underlying pipeline inflation pressures have changed little since April. As such, the majority of members should again feel obliged to vote to keep policy on hold at next week's BoE MPC meeting.

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.