Written by Steven Hansen
The Producer Price Index year-over-year inflation jumped from 1.6 % to 2.2 %. This inflation cycle began in the 2H2016.
Analyst Opinion of Producer Prices
After last month’s pause in inflation, it has returned with a vengance this month. From the BLS:
On an unadjusted basis, the final demand index climbed 2.2 percent for the 12 months ended February 2017, the largest advance since a 2.4-percent increase in the 12 months ended March 2012…..
In February, over 80 percent of the advance in the final demand index is attributable to a 0.4-percent increase in prices for final demand services.
The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.
- The BLS reported that the headline Producer Price Index (PPI) finished goods prices (now called final demand prices) year-over-year inflation rate jumped to 2.2 %,.
- The market had been expecting (from Bloomberg):
| month over month change | Consensus Range | Consensus | Actual |
| PPI-Final Demand (PPI-FD) | -0.1 % to 0.3 % | +0.1 % | +0.3 % |
| PPI-FD less food & energy (core PPI) | 0.0 % to 0.3 % | +0.2 % | +0.1 % |
| PPI-FD less food, energy & trade services | 0.2 % to 0.3 % | +0.3 % | +0.3 % |
The producer price inflation breakdown:
| category | month-over-month change | year-over-year change |
| final demand goods | +0.3 % | |
| final demand services | +0.4 % | |
| total final demand | +0.3 % | +2.2 % |
| processed goods for intermediate demand | +0.4 % | +5.0 % |
| unprocessed goods for intermediate demand | -0.2 % | +19.4 % |
| services for intermediate demand | +0.5 % | +2.0 % |
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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