PPI: U.S. Wholesale Inflation Continue Downward Trend In January

by Ike Obudulu Posted on February 14th, 2019

Washington, D.C., USA: Reflecting steep drops in food and energy prices, the Labor Department released a report on Thursday showing producer prices in the U.S. unexpectedly edged lower in the month of January.

The Labor Department said its producer price index for final demand slipped by 0.1 percent for the second straight month in January. Economists had expected the index to inch up by 0.1 percent.

The unexpected dip in producer prices was partly due to the sharp drop in energy prices, which plunged by 3.8 percent in January after plummeting by 4.3 percent in December.

Food prices also showed a substantial pullback, tumbling by 1.7 percent in January after surging up by 2.6 percent in the previous month.

Excluding food and energy prices, core producer prices climbed by 0.3 percent in January after coming in unchanged in December. Core producer prices were expected to rise by 0.2 percent.

The increase in core prices came as prices for final demand services rose by 0.3 percent in January after showing no change in the previous month.

The Labor Department said prices for trade services advanced by 0.8 percent, accounting for over 80 percent of the total increase in prices for services.

Prices for transportation and warehousing services also climbed by 0.5 percent, while prices for other services were unchanged.

Reflecting the monthly decrease, the annual rate of producer price growth slowed to 2.5 percent in January from 2.8 percent in December.

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The annual rate of growth in core producer prices also slipped to 2.6 percent in January from 2.7 percent in the previous month.

“With inflation contained, the Fed will be guided by the incoming activity data, which justify its ‘patient’ stance,” said Michael Pearce, Senior U.S. Economist at Capital Economics.

On Wednesday, the Labor Department released a separate report showing consumer prices were unchanged for the third straight month in January.

The Labor Department said its consumer price index was unchanged in January, matching the revised reading for December. Economists had expected consumer prices to inch up by 0.1 percent.

Excluding food and energy prices, core consumer prices rose by 0.2 percent for the fifth consecutive month. The uptick in core prices matched economist estimates.

The Labor Department said the annual rate of consume price growth slowed to 1.6 percent in January from 1.9 percent in December, showing the slowest rate of growth since June of 2017.

Meanwhile, the report said the annual rate of core consumer price growth was unchanged from the two previous months at 2.2 percent.

How the Producer Price Index (PPI) differs from the Consumer Price Index (CPI)?

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in prices received (price changes) by producers for domestically produced goods, services, and construction. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI). CPIs measure price change from the purchaser’s perspective.

While both the PPI and CPI measure price change over time for a fixed set of goods and services, they differ in two critical areas: (1) the composition of the set of goods and services, and (2) the types of prices collected for the included goods and services.

The target set of goods and services included in the PPIs is the entire marketed output of U.S. producers. The set includes both goods and services purchased by other producers as inputs to their operations or as capital investment, as well as goods and services purchased by consumers either directly from the service producer or indirectly from a retailer. Because the PPI target is the output of U.S. producers, imports are excluded. The target set of items included in the CPI is the set of goods and services purchased for consumption purposes by urban U.S. households. This set includes imports.

The price collected for an item included in the PPIs is the revenue received by its producer. Sales and excise taxes are not included in the price because they do not represent revenue to the producer. The price collected for an item included in the CPI is the out-of-pocket expenditure by a consumer for the item. Sales and excise taxes are included in the price because they are necessary expenditures by the consumer for the item.

The differences between the PPI and CPI are consistent with the different uses of the two measures. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output. A primary use of the CPI is to adjust income and expenditure streams for changes in the cost of living.

The composition of items in the Finished Goods Price Index differs from that of the All Items Consumer Price Index in two major respects. First, the Finished Goods Price Index includes price changes for producers’ durable equipment, which are not purchased by typical consumers and, therefore, are not included in the CPI. Second, the All Items CPI includes services which are not reflected in the Finished Goods Price Index. An additional difference is that the Finished Goods Price Index is only available at the U.S. level, while the All Items CPI is available at the regional, metropolitan area, and U.S. levels.

Although some data users utilize the PPI as a potential indicator of the Consumer Price Index (CPI), there are many reasons why the PPI and the CPI may diverge. The scope of the personal consumption portion of the PPI includes all marketable output sold by domestic producers for households. The scope of the CPI includes goods and services provided by business or government, where explicit user charges are paid by consumers. For example, the most heavily weighted item in the CPI, owners’ equivalent rent, is excluded from the PPI. The scope of the CPI includes imports. The PPI excludes imports. The CPI only includes components of personal consumption directly paid for by the consumers, while the PPI includes components of personal consumption that may not be paid for by consumers. For example, the PPI includes medical services paid for by third parties. In contrast to CPI, PPI does not completely cover services. PPIs exclude taxes, since they do not represent producer revenue. Conversely, sales and other taxes paid by consumers are part of household expenditure and are included in the CPI. Additional technical differences between PPI and CPI also exist.

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