December 2013 Producer Prices Grow, Above Expectations

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The Producer Price Index again moderately inflated this month and now the year-over-year growth is slightly above 1%. This index is volatile (noisy).

The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

  • The BLS reported that the Producer Price Index (PPI) finished goods prices year-over-year inflation rate rose from 0.7% to 1.2%.
  • The market had been expecting finished goods price inflation of 0.2% to 0.3% month-over-month versus the 0.4% reported.
  • It was energy which drove the month-over-month inflation, while food was a large deflationary pressure – the exact opposite of last month.

The manufacturing supply chain inflation:

  • finished goods annual inflation = from 0.7% to 1.2%
  • intermediate goods annual inflation = from -0.5% to +0.6%
  • crude goods annual inflation = from -2.6% to +2.4%

In the following graph, one can 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.

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 core PPI (excluding food and energy) was up 0.3% 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 next week, should 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 as shown on the first graph in this post. Higher crude material prices push the finished goods prices up.

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