PPI Fundamentals Point to More Price Moderation in February 2012 Data

Written by Steven Hansen

The news in this index is that the supply chain inflation has inverted – almost no year-over-year inflation in the crude goods portion of the index. Historically, crude goods leads finished goods.

The Producer Price Index (PPI) finished goods prices increased 3.3% year-over-year in February 2012 (less than the 4.1% in January) – and increased 0.4% month-over-month. The PPI represents inflation pressure (or lack thereof) that migrates into consumer prices – and the PPI continues to moderate.

The market had been expecting a 0.4% to 0.5% month-over-month increase in finished goods prices (compared to the 0.4% increase).

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.

Looking at the raw indices.

The reasons for the month-over-month increase in finished goods was due to an increase in gasoline prices and non-durable goods (less foods). 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 2.0% YoY. Last month (January 2011) the CPI YoY change was 2.9% (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 graph below. Higher crude material prices push the finished goods prices up.

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