May 2019 Producer Price Final Demand Year-Over-Year Growth Declines to 1.8%

The Producer Price Index (PPI) year-over-year inflation declined from 2.2 % to 1.8 %.

Analyst Opinion of Producer Prices

Despite being in trade wars, the PPI has declined. Trade wars have both postive and negative impacts to prices.

Here is what the BLS said in part:

Final demand goods: The index for final demand goods moved down 0.2 percent in May following three consecutive increases. About three-quarters of the decrease can be traced to prices for final demand energy, which fell 1.0 percent. The index for final demand foods declined 0.3 percent, while prices for final demand goods less foods and energy were unchanged.

Product detail: Nearly 40 percent of the May decrease in the index for final demand goods is attributable to prices for gasoline, which fell 1.7 percent. The indexes for diesel fuel, iron and steel scrap, chicken eggs, beef and veal, and fresh fruits and melons also moved lower. Conversely, prices for prepared poultry products increased 7.0 percent. The indexes for light motor trucks and jet fuel also advanced.

Final demand services: Prices for final demand services moved up 0.3 percent in May, the fourth consecutive increase. Most of the May advance can be traced to the index for final demand services less trade, transportation, and warehousing, which rose 0.5 percent. Prices for final demand transportation and warehousing services climbed 0.7 percent. Conversely, margins for final demand trade services fell 0.5 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail: Nearly 80 percent of the May advance in the index for final demand services is attributable to prices for guestroom rental, which jumped 10.1 percent. The indexes for fuels and lubricants retailing, outpatient care (partial), inpatient care, portfolio management, and transportation of passengers (partial) also moved higher. In contrast, margins for apparel, footwear, and accessories retailing declined 5.2 percent. The indexes for machinery, equipment, parts, and supplies wholesaling and for loan services (partial) also decreased.

The PPI represents inflation pressure (or lack thereof) that migrates into consumer price.

The market had been expecting (from Econoday):

The producer price inflation breakdown:

 

In the following graph, one can see the relationship between the year-over-year change in the intermediate goods index and finished goods index. When the crude goods growth falls under finish goods - it usually drags finished goods lower.

Percent Change Year-over-Year - Comparing PPI Finished Goods (blue line) to PPI Intermediate Goods (red line)

 

Econintersect has shown how pricing change moves from the PPI to the Consumer Price Index (CPI).

Comparing Year-over-Year Change Between the PPI Finished Goods Index (blue line) and the CPI-U (red line)

 

The price moderation of the PPI began in September 2011 when the year-over-year inflation was 7.0%.

Caveats on the Use of Producer Price Index

Econintersect has performed several tests on this series and finds it fairly representative of price changes (inflation). However, the headline rate is an average - and for an individual good or commodity, this series provides many sub-indices for a specific application.

A very good primer on the Producer Price Index nuances can be found here.

Because of the nuances in determining the month-over-month index values, the year-over-year or annual change in the PPI index is preferred for comparisons.

There is a moderate correlation between crude goods and finished goods. Higher crude material prices push the finished goods prices up.