| Consensus | Consensus Range | Actual | Previous | Revised | |
|---|---|---|---|---|---|
| PPI-FD - M/M | 0.1% | -0.1% to 0.2% | 0.2% | -0.2% | 0.0% |
| PPI-FD - Y/Y | 2.3% | 2.3% to 2.4% | 2.6% | 2.2% | 2.4% |
| Ex-Food & Energy - M/M | 0.2% | 0.1% to 0.3% | 0.4% | 0.0% | 0.3% |
| Ex-Food & Energy - Y/Y | 2.3% | 2.3% to 2.4% | 3.0% | 2.3% | 2.6% |
| Ex-Food, Energy & Trade Services - M/M | 0.2% | 0.1% to 0.2% | 0.0% | 0.0% | 0.2% |
| Ex-Food, Energy & Trade Services - Y/Y | 3.1% | 3.2% | 3.3% |
Highlights
Disinflation can't be said for producer prices which are, however tame, back on the climb. Headline prices rose 0.2 percent in June for a 2.6 percent annual rate that's the highest since March last year. Ex-food ex-energy prices rose 0.4 percent on the month for a 3.0 percent annual rate that's the highest since April last year. All these readings exceeded Econoday's consensus estimates.
Services, to the frustration of Federal Reserve officials, are the area that's slowing price normalization. Services in total rose 0.6 percent on the month to double May's 0.3 percent pace. This yearly rate, which has climbed the last seven months in a row, is at 3.5 percent versus May's 3.0 percent."Nearly all of the June increase", according to the text of the report, is tied to trade services which jumped a monthly 1.9 percent. When excluding trade services (wholesale and retail), prices were unchanged on the month which is below Econoday's consensus for a 0.2 percent rise.
Goods prices fell 0.5 percent in the month after falling 0.8 percent in May. The yearly rate for goods, which has been flat, is 1.0 percent versus May's 1.6 percent. Energy (mostly gasoline) pulled goods lower in June falling 2.6 percent on the month. Foods declined 0.3 percent.
It's reports like these that will keep the Fed on its toes and will limit the chances of an early rate cut. Watch for inflation expectations later this morning in the consumer sentiment report for the next inflation update followed on Tuesday next week with import and export prices.
Services, to the frustration of Federal Reserve officials, are the area that's slowing price normalization. Services in total rose 0.6 percent on the month to double May's 0.3 percent pace. This yearly rate, which has climbed the last seven months in a row, is at 3.5 percent versus May's 3.0 percent."Nearly all of the June increase", according to the text of the report, is tied to trade services which jumped a monthly 1.9 percent. When excluding trade services (wholesale and retail), prices were unchanged on the month which is below Econoday's consensus for a 0.2 percent rise.
Goods prices fell 0.5 percent in the month after falling 0.8 percent in May. The yearly rate for goods, which has been flat, is 1.0 percent versus May's 1.6 percent. Energy (mostly gasoline) pulled goods lower in June falling 2.6 percent on the month. Foods declined 0.3 percent.
It's reports like these that will keep the Fed on its toes and will limit the chances of an early rate cut. Watch for inflation expectations later this morning in the consumer sentiment report for the next inflation update followed on Tuesday next week with import and export prices.
Market Consensus Before Announcement
Producer prices in June are expected to rise 0.1 percent on the month versus an unexpected 0.2 percent decline in May. The annual rate in June is seen at 2.3 percent versus May's 2.2 percent. June's ex-food ex-energy rate is seen up 0.2 percent on the month versus no change in the prior month.
Definition
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.
Description
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.
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.
