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--Barry Asmus

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Wednesday, August 17, 2011

Producer Price Index

We've only got one major piece of market data today, but it's a big one:  the Producer Price Index (or, more precisely, indexes).  Given the title of this news item, this should be no surprise.
The Producer Price Index is actually a set of indexes that measure the change in costs of supplies used by manufacturers at all stages of the manufacturing and production process - raw materials, intermediate goods, and finished products.  It's very much like the Consumer Price Index, except for producers, because it is essentially a measure of inflation.  If PPI is up, you can expect to see it eventually flow through to the CPI as well - although not always at a 1:1 ratio.  After all, a lot of manufactured goods are discretionary, and if the prices go up too far people will just refuse to buy them.
Nevertheless, the market pays attention to this figure.  Rising costs, particularly if they don't get passed on to the consumer, cut into corporate profits
The June 2011 results were mixed.  PPI for finished goods fell 0.4% (beating expectations), but core PPI rose 0.3% (missing expectations).  The overall change in PPI was driven by a 2.8% decrease in finished energy.  Intermediate goods PPI changed 0.0%, and crude goods PPI fell 0.6%.
For July 2011, the Econoday-surveyed analysts aren't quite as optimistic.  They're calling for a 0.0% change in PPI for finished goods, and a 0.2% increase in core PPI for finished goods.  And as always, we turn to the US Bureau of Labor Statistics' Producer Price Indexes - July 2011 to see if the analysts are right.  And the short answer is that they are not right.
The Producer Price Index for finished goods actually rose 0.2% (missing expectations), and the core Producer Price Index rose 0.4% (also missing expectations).  The report pins the blame for the core PPI increase on a 2.8% increase in tobacco product prices[1], as well as on an increase in the cost of light motor trucks and pharmaceutical preparations.  The increase in overall PPI is blamed on finished consumer foods, which increased 0.6% (driven by a 2.7% increase in beef and veal prices and by higher prices for fresh fruits and melons), offset slightly by a 0.6% decline in finished energy prices (led by gasoline, which fell 2.8%).
PPI for intermediate goods rose 0.2%, mostly on a 2.1% increase in the cost of plastic resins and materials.  PPI for crude goods fell 1.2%, driven by a 2.6% decline in crude energy materials and a 0.8% decline in crude foodstuffs and feedstuffs.
All in all, not great.  But far from terrible, really.
[1]  Tobacco:  not food, and not energy.

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