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July Producer Price Index Plummets

August 12, 2016

by Doug Short

Today's release of the July Producer Price Index (PPI) for Final Demand came in at -0.4% month-over-month seasonally adjusted, down dramatically from 0.5% in June. This is the largest seasonally adjusted MoM decline since February 2015, 17 months ago. It is down 0.2% year-over-year versus the 0.3% YoY last month. Core Final Demand (less food and energy) came in at -0.3% MoM, down from 0.4% the previous month and is up 0.7% YoY. Investing.com MoM consensus forecasts were for 0.1% headline and 0.2% core.

Here is the summary of the news release on Final Demand:

The Producer Price Index for final demand decreased 0.4 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices rose 0.5 percent in June and 0.4 percent in May. On an unadjusted basis, the final demand index moved down 0.2 percent for the 12 months ended in July. (See table A.)

In July, the decline in the final demand index was led by prices for final demand services, which fell 0.3 percent. The index for final demand goods decreased 0.4 percent.

Prices for final demand less foods, energy, and trade services were unchanged in July after rising 0.3 percent in June. For the 12 months ended in July, the index for final demand less foods, energy, and trade services increased 0.8 percent. More…

Finished Goods: Headline and Core

The BLS shifted its focus to its new "Final Demand" series in 2014, a shift we support. However, the data for these series are only constructed back to November 2009 for Headline and April 2010 for Core. Since our focus is on longer term trends, we continue to track the legacy Producer Price Index for Finished Goods, which the BLS also includes in their monthly updates.

As this overlay illustrates, the Final Demand and Finished Goods indexes are highly correlated.

Final Demand vs. Finished Goods
FRED® Graphs ©Federal Reserve Bank of St. Louis. All rights reserved.

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 that began in mid-2014 in headline PPI is, of course, energy related. It is now off its interim low set in April of last year. Year-over-year Core PPI, now at 1.2%, has trended lower from its 2.3% interim high set the middle of last year.

Producer Price Index

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.

PPI CPI Core Comparison

Check back next month for a new update.