Producer Price Index: Final Demand Hotter Than Forecast

 |  Includes: DIA, IWM, QQQ, SPY
by: Doug Short

Today's release of the March Producer Price Index (PPI) for Final Demand rose 0.5% month-over-month seasonally adjusted for Headline inflation. Today's data point was higher than the 0.1% forecast. Core Final Demand rose 0.6% from last month, topping the forecast of 0.2%.

Year-over-year both Headline and Core are up 1.4%.

Here is the essence of the news release on Finished Goods:

The Producer Price Index for final demand advanced 0.5 percent in March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a decline of 0.1 percent in February and a rise of 0.2 percent in January. On an unadjusted basis, the index for final demand moved up 1.4 percent for the 12 months ended in March, the largest 12-month advance since a 1.7-percent increase in August 2013. (See table A.)

In March, the 0.5-percent increase in final demand prices can be traced to the index for final demand services, which rose 0.7 percent. Prices for final demand goods were unchanged. More...

The BLS shifted its focus to its new "Final Demand" series earlier this year. I fully endorse this shift. However, the data for these series are only constructed back to November 2009 for Headline and April 2010 for Core. Since my focus is on longer term trends, I continue to track the legacy Producer Price Index for Finished Goods, which the BLS also includes in their monthly updates.

The March Headline Finished Goods was down 0.1% MoM but up 1.73% YoY. Core Finished Goods rose 0.1% MoM and is up 1.68% YoY.

Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increased in 2011 and then eased during 2012 and most of 2013. This small rise in recent months still has this indicator below the common 2% benchmark.

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As the next chart shows, the Core Producer Price Index is more volatile than the Core Consumer Price Index. For example, during the last recession producers were unable to pass cost increases to the consumer. Likewise in 2010 the Core PPI generally rose while Core CPI generally fell. Since 2012, Core PPI steadily trended downward but has bounced in recent months. Since January of last year, Core PPI has come in below Core CPI every month except June, when there was a tiny 0.01% crossover. But in 2014 the relationship has reversed, which puts the squeeze on producers.

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Check back next month for a new update.