| Actual | Previous | |
| Month over Month | -0.8% | 2.0% |
| Year over Year | -3.7% | -2.1% |
Highlights
Producer prices in the domestic market fell 0.8 percent in February month-on-month and were 3.7 percent lower than their year-ago level, compared to a 2.0 percent monthly increase in January, and a fall of 2.1 percent year-on-year.
Energy prices were the biggest factor in the decline as they fell 2.5 percent month-on-month and 11.0 percent year-on-year in February. This will no doubt be reversed in March which is when the conflict in the Middle East started and choked off oil exports through the Straight of Hormuz.
Excluding energy, prices were up 0.1 percent month-on month, and 1.1 percent year-on-year.
Other main industry groups saw prices higher for the most part, with the exceptions being consumer goods, down 0.4 percent month-on-month. Capital goods rose 0.2 percent month-on-month and 1.1 percent from a year ago with intermediate goods prices up 0.4 and 1.7 percent respectively.
Should these price increases persist into March; higher energy costs will certainly help drive overall pipeline inflation higher. The question will be whether producers pass along cost increases to their customers or eat them in order to preserve market share.
Definition
The producer price indices (PPI) measure transaction prices, exclusive of VAT, for goods from industrial activities sold on the Italian market. Construction is excluded. 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.
Description
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.
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 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.