PPI: U.S. Wholesale Inflation Drops 0.1% vs 0.2% Rise Expected In August

by Ike Obudulu Posted on September 12th, 2018

Washington, D.C., USA: The Producer Price Index (PPI), a measure that tracks change in the price of finished goods and services sold by producers, shows final declined 0.1 percent in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

Economists consensus was for a rise in Producer Price Index (PPI) of 0.2% in August.

Final demand prices were unchanged in July  and increased 0.3 percent in June.

On an unadjusted basis, the final demand index rose 2.8 percent for the 12 months ended in August.

In August, the decline in the final demand index can be attributed to a 0.1-percent decrease in prices for final demand services. The index for final demand goods was unchanged.

The index for final demand less foods, energy, and trade services edged up 0.1 percent in August after advancing 0.3 percent in both July and June. For the 12 months ended in August, prices for final demand less foods, energy, and trade services rose 2.9 percent.

Despite the moderation in producer prices last month, overall inflation is steadily rising against the backdrop of a strong labor market and robust economy. The Trump administration’s import tariffs on lumber, washing machines, solar panels, steel and aluminum, as well as a range of Chinese goods, are also expected to push up price pressures.

The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 2.0 percent in July, hitting the U.S. central bank’s 2 percent target for the third time this year

Over 80 percent of the drop in the cost of services last month was attributed to margins for machines and equipment wholesaling, which fell 1.7 percent

Final demand services

The index for final demand services inched down 0.1 percent in August, the same as in July. The August decrease was led by a 0.9-percent decline in the index for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Prices for final demand transportation and warehousing services fell 0.6 percent. In contrast, the index for final demand services less trade, transportation, and warehousing rose 0.3 percent.

In August, over 80 percent of the decrease in prices for final demand services can be traced to margins for machinery and equipment wholesaling, which fell 1.7 percent. The indexes for health, beauty, and optical goods retailing; application software publishing; airline passenger services; and hospital outpatient care also moved lower. Conversely, prices for loan services (partial) jumped 3.0 percent. The indexes for food retailing, bundled wired telecommunication access services, and physician care also rose.

Final demand goods

The index for final demand goods was unchanged in August after increasing in each of the prior three months. In August, a 0.4-percent advance in prices for final demand energy offset a 0.6-percent decline in the index for final demand foods. Prices for final demand goods less foods and energy were unchanged.

In August, the index for residential electric power moved up 0.6 percent. Prices for fresh and dry vegetables, corn, gasoline, and passenger cars also increased. In contrast, the index for fresh fruits and melons dropped 11.3 percent. Prices for diesel fuel, meats, eggs for fresh use, and iron and steel scrap also declined.

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.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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