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 June 2012 (same as the 0.7% in May) – and increased 0.1% 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 0.6% to 0.8% month-over-month contraction in finished goods prices (compared to the 0.1% growth).
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.
Percent Change Year-over-Year – Comparing PPI Finished Goods (blue line) to PPI Crude Materials (red line)
Percent Change Month-over-Month- Comparing PPI Finished Goods (blue line) to PPI Crude Materials (red line)
The reasons for the moderate month-over-month increase in finished goods was due to a decline in finished energy goods but food’s increase was more. The core PPI (excluding food and energy) rose 0.2% month-over-month. Removing food and energy was originally done to remove the noise from the index, however the usefulness in the twenty-first century is questionable except in certain specific circumstance.
PPI Core Inflation (finished goods less food & energy) – Year-over-Year (blue line) and Month-over-Month (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 – which will be released tomorrow, should come in around 1.6% YoY – although recent trends indicate the moderation will be much less. Last month (May 2012) the CPI YoY change was 1.7% (analysis here).
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%. 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.
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 as shown on the first graph in this post. Higher crude material prices push the finished goods prices up.