Wed Jun 20 01:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.4% 0.5% 0.5%
Year over Year 2.5% 2.7% 2.0%

Producer prices rose a slightly larger than expected 0.5 percent on the month in May. This matched the April advance and was the third gain in a row. It was also enough to lift annual PPI inflation by 0.7 percentage points to 2.7 percent, equalling its highest mark since September 2017.

May's monthly advance was built upon a 1.3 percent rise in energy charges. Without this boost, the PPI would have increased a much more modest 0.2 percent versus April and 1.7 percent on the year, just a tick above its rate last time. Elsewhere, intermediates were up a relatively firm monthly 0.4 percent but capital and consumer goods edged only a tick firmer.

The underlying trend in PPI inflation is still essentially flat indeed, the annual rate is some 0.4 percentage points short of its mark at the start of the year. Capacity pressures have been an issue for some time in German industry but have yet to have a significant impact on factory gate prices. If sustained, slowing growth of new orders suggests that this could remain the case 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.