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posted on 12 October 2017

September 2017 Producer Price Final Demand Year-over-Year Inflation Increased

Written by Steven Hansen

The Producer Price Index year-over-year inflation grew from 2.4 % to 2.6 %.

Analyst Opinion of Producer Prices

The Producer Price Index surged year-over-year. I would assume this is a hurricane affect. Here is what the BLS said in part:

Hurricanes Harvey and Irma had virtually no impact on data collection efforts or survey response rates, and no changes in estimation procedures were necessary.

Even though there were no data collection issues - the hurricanes do affect pricing. Here is what the BLS said:

Higher energy prices were likely the result of reduced refining capacity in the Gulf Coast area due to Hurricane Harvey.

I suspect the impacts are much broader than to just energy prices.

The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

The market had been expecting (from Bloomberg):

month over month change Consensus Range Consensus Actual
PPI-Final Demand (PPI-FD) 0.3 % to 0.5 % +0.4 % +0.4 %
PPI-FD less food & energy (core PPI) 0.1 % to 0.4 % +0.2 % +0.4 %
PPI-FD less food, energy & trade services 0.2 % to 0.3 % +0.2 % +0.2 %

The producer price inflation breakdown:

category month-over-month change year-over-year change
final demand goods +0.7 %
final demand services +0.4 %
total final demand +0.4 % +2.6 %
processed goods for intermediate demand +0.5 % +4.3 %
unprocessed goods for intermediate demand -0.4 % +7.0 %
services for intermediate demand +0.1 % +2.7 %

z ppi1.png

In the following graph, one can see the relationship between the year-over-year change in intermediate goods index and finished goods index. When the crude goods growth falls under finish goods - it usually drags finished goods lower.

Percent Change Year-over-Year - Comparing PPI Finished Goods (blue line) to PPI Intermediate Goods (red line)

Econintersect has shown how pricing change moves from the PPI to the Consumer Price Index (CPI). This YoY change implies that the CPI, should continue to come in around 2.0 % YoY.

Comparing Year-over-Year Change Between the PPI Finished Goods Index (blue line) and the CPI-U (red line)

The price moderation of the PPI began in September 2011 when the year-over-year inflation was 7.0%.

Caveats on the Use of Producer Price Index

Econintersect has performed several tests on this series and finds it fairly representative of price changes (inflation). However, the headline rate is an average - and for an individual good or commodity, this series provides many sub-indices for specific application.

A very good primer on the Producer Price Index nuances can be found here.

Because of the nuances in determining the month-over-month index values, the year-over-year or annual change in the PPI index is preferred for comparisons.

There is moderate correlation between crude goods and finished goods. Higher crude material prices push the finished goods prices up.



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