PPI: U.S. Wholesale Inflation Edges Down 0.2% In December

by Ike Obudulu Last updated on April 11th, 2019,

Washington, D.C., USA: A report released by the Labor Department on Tuesday showed a modest decrease in U.S. producer prices in the month of December.

The Labor Department said its producer price index for final demand dipped by 0.2 percent in December after inching up by 0.1 percent in November. Economists had expected prices to slip by 0.1 percent.

The modest pullback in producer prices was partly due to another steep drop in energy prices, which plunged by 5.4 percent in December after tumbling by 5.0 percent in November.

On the other hand, the report said food prices surged up by 2.6 percent in December following a 1.3 percent jump in the previous month.

Excluding food and energy prices, core producer prices edged down by 0.1 percent in December after climbing by 0.3 percent in November. Core prices had been expected to rise by 0.2 percent.

The unexpected dip in core prices came as service prices slipped by 0.1 percent in December following a 0.3 percent increase in November.

Prices for trade and transportation and warehousing services fell by 0.3 percent and 0.2 percent, respectively, while prices for other services crept up by 0.1 percent.

While producer prices moved modestly lower in December, the annual rate of producer price growth was unchanged from the previous month at 2.5 percent. The annual rate of core price growth was also unchanged 2.7 percent.

“December’s drop in the producer price index was mostly an energy story, but there are signs of underlying price pressures moderating too,” said Michael Pearce, Senior U.S. Economist at Capital Economics.

Last Friday, the Labor Department released a separate report showing consumer prices edged slightly lower in December, with the modest decrease largely reflecting a steep drop in gasoline prices.

The Labor Department said its consumer price index slipped by 0.1 percent in December after coming in unchanged in November. The slight drop in consumer prices matched economist estimates.

Energy prices showed another significant decrease during the month, plunging by 3.5 percent in December following a 2.2 percent slump in the previous month.

The steep drop in gasoline prices led the way lower, with gas prices plummeting by 7.5 percent in December after tumbling by 4.2 percent in November.

On the other hand, the report said food prices climbed by 0.4 percent in December, the largest increase since May of 2014. Prices for fruits and vegetables surged higher.

Excluding food and energy prices, the core consumer price index rose by 0.2 percent in December, matching the increases seen in the two previous months as well as expectations.

Higher prices for shelter, recreation, medical care, and household furnishings and operations more than offset lower prices for airline fares, used cars and trucks, and motor vehicle insurance.

The report said the annual rate of consume price growth slowed to 1.9 percent in December from 2.2 percent in November, while the annual rate of core consumer price growth was unchanged 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.

Other Economy News: New York Manufacturing Index Drops To Lowest Level In Over A Year

New York manufacturing activity grew at its slowest pace in over a year in the month of January, according to a report released by the Federal Reserve Bank of New York on Tuesday.

The New York Fed said its general business conditions index slumped to 3.9 in January after tumbling to a revised 11.5 in December.

A positive reading still indicates growth, although economists had expected the index to show a much more modest decrease to 10.8.

With the much bigger than expected decrease, the New York Fed said the index dropped to its lowest level in well over a year.

Michael Pearce, Senior U.S. Economist at Capital Economics, said the steep drop by the New York manufacturing index suggests the decrease by the Institute for Supply Management’s national manufacturing index in December won’t be reversed in January.

The continued decrease by the headline index was partly due to notably slower new orders growth, as the new orders index plunged to 3.5 in January from 13.4 in December.

The shipments index also fell to 17.9 in January from 20.3 in December, indicating a modest slowdown in the pace of shipment growth.

The report also showed a significant slowdown in the pace of job growth, with the number of employees index plummeting to 7.4 in January from 17.5 in December.

With regard to inflation, the prices paid index dropped to 35.9 in January from 39.7 in December, while the prices received index inched up to 13.1 from 12.8.

The New York Fed also said firms were less optimistic about the six-month outlook than in recent months, as the index for future business conditions tumbled to 17.8 in January from 30.6 in December.

On Thursday, the Philadelphia Federal Reserve is scheduled to release its report on regional manufacturing activity in January. The Philly Fed Index is expected to inch up to 10.0 in January from 9.4 in December.

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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