PPI: U.S. Wholesale Inflation Rises More Than Expected In October

by Ike Obudulu Posted on November 9th, 2018

Washington, D.C., USA: The Producer Price Index for final demand rose 0.6 percent (vs 0.2 percent expected) in October, seasonally adjusted, the U.S. Bureau of Labor Statistics data showed on today.

The figures, which measure wholesale and other selling prices at businesses, indicate that price pressures in the production pipeline are advancing steadily. Along with solid demand, the tariff war with China has raised concern that producers will face rising prices and supply-chain disruptions for materials. The Federal Reserve on Thursday reiterated its plan to keep lifting interest rates gradually.

While the consumer price index — due next week — is considered a more important indicator of inflation, data on producer prices help provide insights into the direction of input costs that businesses are facing. Analysts watch this data to assess how likely it is that gains will filter through on to consumers.

Final demand prices advanced 0.2 percent in September and declined 0.1 percent in August. On an unadjusted basis, the final demand index increased 2.9 percent for the 12 months ended in October.

In October, over 60 percent of the rise in final demand prices can be traced to a 0.7-percent advance in the index for final demand services. Prices for final demand goods moved up 0.6 percent.

The index for final demand less foods, energy, and trade services rose 0.2 percent in October after climbing 0.4 percent in September. For the 12 months ended in October, prices for final demand less foods, energy, and trade services advanced 2.8 percent.

Final Demand Services

The index for final demand services increased 0.7 percent in October, the largest advance since climbing 0.8 percent in January 2016. Nearly three-fourths of the broad-based October rise can be traced to margins for final demand trade services, which moved up 1.6 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services increased 0.2 percent and 0.6 percent, respectively.

Product detail: About one-fifth of the October advance in prices for final demand services is attributable to a 1.2-percent rise in margins for machinery, equipment, parts, and supplies wholesaling. The indexes for food and alcohol retailing; health, beauty, and optical goods retailing; inpatient care; apparel, jewelry, footwear, and accessories retailing; and traveler accommodation services also moved higher. In contrast, prices for loan services (partial) fell 0.5 percent. The indexes for hospital outpatient care and furniture retailing also declined.

Final demand goods

The index for final demand goods climbed 0.6 percent in October, the largest rise since advancing 0.9 percent in May. Nearly three-fourths of the October increase can be traced to prices for final demand energy, which moved up 2.7 percent. The index for final demand foods rose 1.0 percent. Prices for final demand goods less foods and energy were unchanged.

Product detail: Over 60 percent of the October increase in prices for final demand goods is attributable to the gasoline index, which jumped 7.6 percent. Prices for diesel fuel, fresh and dry vegetables, beef and veal, cigarettes, and jet fuel also moved higher. Conversely, the motor vehicles index fell 0.7 percent. (In accordance with usual practice, most new-model-year passenger car and light motor trucks were introduced into the PPI in October.Prices for liquefied petroleum gas and for fresh fruits and melons also decreased.

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.

Markets

U.S. stocks slumped as investors considered what a tumble in oil prices means for the economy. The dollar extended a gain and gold dropped after a report showed producer prices rose more than forecast in October.

The S&P 500 pared a second straight weekly advance, with energy producers tumbling the most as crude fell deeper into a bear market as it heads for the longest losing streak on record. The tech-heavy Nasdaq indexes sank after chipmaker Skyworks plunged on weak results. Walt Disney’s strong earnings buoyed the Dow Jones Industrial Average.

Mexico’s stock market fell for a second day and its bonds slid with the peso as investors grow concerned about the incoming president’s plans for the economy. Europe’s main equity gauge dropped after disappointing forecasts from Richemont and Thyssenkrup AG. Treasury yields edged lower after the Federal Reserve on Thursday reiterated its plan for “further gradual” rate increases.

Investors have their eyes open to any signs the economic cycle is peaking. While lower oil prices seem mostly driven by a surge in supply, not a drop in demand, there are more worrisome signs coming out of China. Data there show softer producer-price gains, weak car sales and a disappointing outlook from a top online travel company, helping to reignite lingering concerns about the health of the world’s second-biggest economy.

Asian financial shares performed particularly poorly following news that Beijing plans to set quotas for banks to pump credit into private companies. The offshore yuan held this week’s drop as there was little sign of an end to the U.S.-China trade war in the wake of the midterm elections.

Elsewhere, the pound weakened amid ongoing speculation over a potential Brexit deal. Emerging-market stocks and currencies slid.

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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