October 2012 Producer Price Index Inflation Remains Moderate

Written by Steven Hansen

The Producer Price Index inversion remains this month – in other words crude product price inflation is lower than finished goods.  Food prices jumped this month, but was more than offset by declines in most other finished goods.

The BLS reported that the Producer Price Index (PPI) finished goods prices year-over-year inflation grew slightly from 2.1% in September 2012 to 2.3% in October 2012 – even though the month-over-month declined 0.2%. The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

The market had been expecting a -0.2% to 0.1% month-over-month growth in finished goods prices compared to the -0.2% growth.

The supply chain remains inverted (a situation where year-over-year crude and intermediate goods price inflation rates remain less than finished goods).

  • finished goods annual inflation = 2.3%
  • intermediate goods annual inflation = 0.8%
  • crude goods annual inflation = -0.2%

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 usually drags finished goods lower. In October, 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 broad based and led by prices for crude energy materials, which rose 4.4%. The core PPI (excluding food and energy) was unchanged month-over-month (the market expect core to grow 0.1%). 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, left axis) and Month-over-Month (red line, right axis)

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 (September 2012) the CPI YoY change was 2.0% (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 moderating inflation trend seems to ending.

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.

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