PPI: U.S. Wholesale Inflation Flat In July

by Ike Obudulu Posted on August 9th, 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 demand was unchanged in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

Final demand prices advanced 0.3 percent in June and 0.5 percent in May. On an unadjusted basis, the final demand index increased 3.3 percent for the 12 months ended in July.

In July, a 0.1-percent rise in the index for final demand goods offset a 0.1-percent decline in prices for final demand services.

The index for final demand less foods, energy, and trade services moved up 0.3 percent in July, the same as in June. For the 12 months ended in July, prices for final demand less foods, energy, and trade services climbed 2.8 percent.

Final Demand Goods

The index for final demand goods inched up 0.1 percent in July, the same as in June. The July advance in prices for final demand goods can be traced to a 0.3-percent rise in the index for final demand goods less foods and energy. In contrast, prices for final demand energy fell 0.5 percent, and the index for final demand foods decreased 0.1 percent.

Product detail: In July, a major factor in the increase in prices for final demand goods was the index for pharmaceutical preparations, which rose 0.7 percent. Prices for eggs for fresh use, fresh fruits and melons, motor vehicles, and liquefied petroleum gas also moved higher. Conversely, the electric power index fell 1.6 percent. Prices for meats; hay, hayseeds, and oilseeds; and nonferrous scrap also
decreased.

Final demand services:

Prices for final demand services edged down 0.1 percent in July, the first decline since falling 0.2 percent in December 2017. The July decrease is attributable to the index for final demand trade services, which moved down 0.8 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) In contrast, prices for final demand services less
trade, transportation, and warehousing and the index for final demand transportation and warehousing services advanced 0.3 percent.

Product detail: Leading the July decline in prices for final demand services, margins for fuels and lubricants retailing dropped 12.7 percent. The indexes for machinery and equipment parts and supplies wholesaling, food retailing, hospital outpatient care, and airline passenger services also moved lower. Conversely, prices for guestroom rental climbed 3.9 percent. The indexes for apparel,
jewelry, footwear, and accessories retailing; inpatient care; and truck transportation of freight also increased.

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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