Written by Steven Hansen
The supply chain inflation continues to be inverted – with deflation in the crude and intermediate goods portion of the index. Historically, crude goods trends drive finished goods trends.
The Producer Price Index (PPI) finished goods prices increased 0.7% year-over-year in May 2012 (less than the 1.9% in April) – and declined 1.0% month-over-month. The PPI represents inflation pressure (or lack thereof) that migrates into consumer prices – and the PPI continues to moderate. This moderation in PPI has global aspects.
The market had been expecting a 0.4% to 0.7% month-over-month contraction in finished goods prices (compared to the 1.0% contraction).
In the following graph, one can clearly see the relationship between the year-over-year change in crude good index and the finish goods index. When the crude goods growth falls under finish goods – it drags finished goods lower. In May, crude goods year-over-year growth is lower than finished goods.
Looking at the raw indices.
The reasons for the moderate month-over-month increase in finished goods was due to a decline in finished energy goods. The core PPI (excluding food and energy) rose 0.2% month-over-month.
Econintersect has shown how pricing change moves from the PPI to the Consumer Price Index (CPI). This YoY change implies that the CPI – which will be released tomorrow, should come in around 1.8% YoY – although recent trends indicate the moderation will be much less. Last month (April 2012) the CPI YoY change was 2.3% (analysis here).
The price moderation of the PPI began in September 2011 when the year-over-year inflation was 7.0%. The trend remains that inflation is moderating.
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.
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 as shown on the first graph in this post. Higher crude material prices push the finished goods prices up.