The Producer Price Index is one of two key market pricing series put out by the Bureau of Labor Statistics on a monthly basis. It is one of the oldest continuous data series collected by the Federal government, having begun in the 1890s. It consists of a weighted index of prices measured at the wholesale and production levels. The BLS releases an index for commodities (for example energy, natural gas, scrap metals), intermediate goods (like fuel, lumber, steel bar), and for finished goods. The PPI serves as a good indicator of medium term inflation prospects. It is not measuring consumer prices, and many producer prices are locked into longer term contracts. As such, it measures spot prices better than actual consumer inflation.
The Producer Price Index for “final demand goods” (what BLS is now calling finished goods) was flat in August, which means that the PPI is up 1.8 percent on the year, off slightly from the 2.0 percent level earlier in the year, and in line with the growth in the index as of August 2013. The Producer Price Index for intermediate goods fell 0.3 percent in August reflecting a 1.7 percent decrease in processed energy products, while the index for unprocessed goods fell 3.3 percent, the largest decrease since a 3.3-percent decline in June 2012. This reflects a 4 month streak of declining prices for internationally traded commodity products like grains and energy, and is a sign of the overall weakness in the world economy.
Looking at the 12-month trailing PPI over the last year, the rapid increase in commodity prices over the past year was almost completely mitigated by the production process. As the table shows, during the first part of the year, commodity prices were rising at rates approaching 6 percent year over year. However, price increases for intermediate goods never went above 1.6 percent. In other words, the production process was eating the cost of higher commodity prices. Final goods prices rose slightly faster than those for intermediate products as well, again suggesting that most of the cost increases were eaten up at the primary manufacturing level.
As we reported last month, much of the cost savings was the result of contracting. Most commodity products are no longer purchased on the spot market but rather through long term contracts. This can not only lead to generally lower prices, but also helps to minimize cost fluctuation at the production level. In addition wages – which can make up to 70 percent or so final product costs – have been flat or falling in the US over the past 6 years.
Since the producer price index is a true index and reflects only changes in production processes, it shows how productivity changes overall impact prices. If technological and process changes continue to occur prices should continue to be kept in check.
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