Producer Price Index: Another Negative Surprise

March 13, 2015

by Doug Short

Today's release of the February Producer Price Index (PPI) for Final Demand came in at -0.5% month-over-month seasonally adjusted. That follows the previous month's -0.8% decline. Core Final Demand (less food and energy) also came in at -0.5% month-over-month following a -0.1% change the month before. The forecasts were for 0.3% headline and 0.1% core.

The year-over-year change in Final Demand is -0.7%, the lowest in the brief history of this data series.

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

The Producer Price Index for final demand fell 0.5 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved down 0.8 percent in January and 0.2 percent in December. On an unadjusted basis, the index for final demand decreased 0.6 percent for the 12 months ended in February....

In February, about 70 percent of the decline in final demand prices can be attributed to a 0.5-percent decrease in the index for final demand services. Prices for final demand goods moved down 0.4 percent. More…

Finished Goods: Headline and Core

The BLS shifted its focus to its new "Final Demand" series in 2014. I fully support 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 Headline Finished Goods for February came in at -0.10% MoM and is down -3.51% YoY. Core Finished Goods were up 0.11% MoM and 1.49% 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. The plunge over the past several months in headline PPI is, of course, energy related -- now at its lowest level since 2009. Core PPI has remained quite stable over the past year.

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As the next chart shows, the Core Producer Price Index is far 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 to its interim low in August of 2013. It rose in the final months of 2013 and remained in a relatively narrow range in 2014.

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Check back next month for a new update.

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