Producer prices were lower than expected in March, with the headline index contracting 0.5 percent on the month after being unchanged in February, the largest decline since April 2020, below Econoday's consensus of flat prices. The pace of growth slowed down to 2.7 percent year-over-year from 4.9 percent, the smallest increase since January 2021. Excluding food and energy, the index edged down 0.1 percent, below the 0.3 percent month gain expected by forecasters, for a 12-month advance of 3.4 percent. When also excluding trade services, producer prices were up 0.1 percent on the month after 0.2 percent in February, the lowest since May 2020. On a 12-month basis, the core index rose 3.6 percent in March, down from 4.5 percent in February, the lowest growth rate since March 2021.

An energy-led 1.0 percent drop in goods prices accounted for two-thirds of the 0.5 percent decline in the headline index. Energy fell 6.4 percent while food was up 0.6 percent after falling 2.2 percent in February. Final demand services prices decreased 0.3 percent in March, the largest contraction since April 2020, led by margins for final demand trade services. Trade was down 0.9 percent on the month. Transportation and warehousing fell 1.3 percent on the month, bringing down the 12-month rate to 0.5 percent from 7.7 percent, the lowest since a 2.9 percent drop in February 2021.

At the retail level, prices rose 5.0 percent year-over-year in March, a full percentage point less than in February, and the smallest increase since May 2021. That being said, the core CPI increased faster than in February, at 5.6 percent versus 5.5 percent.

Today's data further tilt the balance towards an overall easing of inflation pressures and combine with an Econoday Consensus Divergence Index, at minus 42, consistent with monetary policy building easing risk.

After edging 0.1 percent lower on the month in February, producer prices in March are expected to hold unchanged. March's ex-food ex-energy rate is seen up 0.3 percent versus February's no change.

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 rent—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.