The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Why Investors Care
| Released on 1/17/07 For Dec 2006 | |||||||||||||||||||||||||
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Highlights
Producer prices increased 0.9 percent in December, following a 2.0 percent jump in November. Most of the rise was in both food and energy. The core rate was more subdued. December's overall figure was well above the consensus forecast for a 0.5 percent boost in the PPI. The core rate decelerated sharply to a 0.2 percent rise, following a 1.3 percent rebound in November. The consensus had projected a 0.1 percent advance in the core PPI.
Finished goods strength was in both consumer goods and in capital equipment. Finished consumer goods prices jumped 1.2 percent in December, following a 2.2 percent rise in November. For the latest month, finished consumer food prices increased 1.7 percent while finished consumer goods excluding food rose 1.0 percent. Food price increases were primarily in fresh fruits and in fresh vegetables. Gasoline prices rose 7.1 percent in December after a monthly 17.9 percent jump in November. The volatile passenger car component actually slipped 0.2 percent, following a 2.2 percent boost the month before, Capital equipment prices slowed to a 0.2 percent gain in December after a 1.4 percent surge in November. In contrast to the consumer equivalent, within capital equipment, the light trucks index rose 0.7 percent in the latest month, following a 2.2 percent increase in November. Due to off and on discounting, motor vehicle prices are very volatile.
By special groupings, energy rose 2.5 percent in December, following a 6.1 percent rebound in November. December's increase was led by gasoline which increased 0.7 percent in December. Other energy components were heating oil, up 4.0 percent; residential electricity, up 0.1 percent; and residential gas, up 0.7 percent. Excluding energy prices, the PPI rose 0.5 percent in December, following a 1.0 percent rebound in November. The latest increase was largely due to a boost in food prices.
The year-on-year core rate rose to up 2.0 percent in December from up 1.8 percent in November. The year-on-year rate for the overall PPI increased to up 1.2 percent from up 0.9 percent in November.
Overall prices at the crude level of production slowed to a 2.9 percent rise in December after increasing 15.7 percent in November. Excluding food and energy, crude prices increased 1.0 percent following a 0.5 percent rise in November. Prices at the intermediate level increased 0.5 percent in December, following a 0.7 percent rebound in November. Excluding food and energy, intermediate prices slipped 0.1 percent, compared to 0.3 percent dip in November.
Today's report primarily reflects the fact that many PPI components are volatile - especially food and energy. This is not news. The core rate has come back down - primarily due to softness in passenger car prices. We see two divergent trends in today's numbers - core numbers are looking good while food and energy are problem areas. While we know energy prices are coming down, food prices are going to be a problem over the next month or two based on the recent freeze in California.
The producer price index jumped 2.0 percent in November, following a 1.6 percent decline in October. Recently, the PPI has had a handful of volatile components that have made reading the underlying trend difficult. In the latest month, energy and motor vehicles and motor vehicles were responsible for the spike in the PPI. The motor vehicle component even helped boost the core PPI to a rebound of 1.3 percent, following a 0.9 percent drop in October. Markets will be watching the core PPI but also will be looking to see how the motor vehicles component is affecting the core.
PPI Consensus Forecast for December 06: +0.5 percent
Range: +0.2 to +0.9 percent
PPI ex food & energy Consensus Forecast for December 06: +0.1 percent
Range: -0.1 to +0.3 percent
![[Chart]](chart.gif)
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It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations. |
![[Chart]](chart_1.gif)
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Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI. |
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