Producer Price Index Rises Above Expectations

July 16, 2014

by Doug Short

Today's release of the June Producer Price Index (PPI) for Final Demand rose 0.4% month-over-month seasonally adjusted. Core Final Demand was up 0.2% from last month. The headline number was well above the Investing.com expectation, which was for a 0.2% increase for both numbers.

The unadjusted year-over-year change in Final Demand is up 1.9%, little changed from last month's YoY of 2.0%.

Here is the essence of the news release on Finished Goods:

The Producer Price Index for final demand rose 0.4 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.2-percent decline in May and a 0.6-percent advance in April. On an unadjusted basis, the index for final demand moved up 1.9 percent for the 12 months ended in June....

In June, the 0.4-percent increase in final demand prices can be traced to a 0.5-percent advance in the index for final demand goods and a 0.3-percent rise in prices for final demand services. More…

Finished Goods: Headline and Core

The BLS shifted its focus to its new "Final Demand" series earlier this year. I fully support this shift. However, the data for these series are only constructed back to November 2009 for Headline and April 2010 for Core. Since my focus is on longer term trends, I continue to track the legacy Producer Price Index for Finished Goods, which the BLS also includes in their monthly updates.

The June Headline Finished Goods rose a surprising 0.70% MoM and is up 2.75% YoY, up slightly from last month's 2.45%. Core Finished Goods rose 0.21% MoM and is up 1.89% YoY.

Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increased in 2011 and then eased during 2012 and most of 2013, falling as low as 1.15% last August. It shot up in the early winter near the 2% benchmark and has hovered below that level for the past six months.

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As the next chart shows, the Core Producer Price Index is far more volatile than the Core Consumer Price Index. For example, during the last recession producers were unable to pass cost increases to the consumer. Likewise in 2010 the Core PPI generally rose while Core CPI generally fell. Since 2012, Core PPI steadily trended downward but has bounced in recent months. Since January of 2013, Core PPI has been below 2%, but it is well off its interim 1.15% low in August of last year.

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Check back next month for a new update.

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