Written by Steven Hansen
The story this month on the Producer Price Index is its sudden jump – driven mostly by energy, but food price inflation was no slouch either.
The BLS reported that the Producer Price Index (PPI) finished goods prices year-over-year inflation jumped from 0.5% in July 2012 to 2.0% in August 2012 – this equates to a 1.7% rise 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 1.2% month-over-month growth in finished goods prices compared to the 1.7% growth.
The supply chain remains inverted (year-over-year crude and intermediate goods price inflation rates remain less than finished goods) – however, it is not uncommon historically that finish goods rises even with this inversion. In any event, the monthly rise in crude goods was 5.8% – a very large jump historically (graph below shows month-over-month change of crude goods.
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 August, crude goods year-over-year price 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 significant month-over-month increase in finished goods was due to a rise in finished energy goods and food. The core PPI (excluding food and energy) rose 0.2% month-over-month (the market expect core to grow 0.1% to 0.2%). 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 2.0% YoY – although recent trends indicate the moderation will be much less. Last month (June 2012) the CPI YoY change was 1.4% (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.