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Producer Price Index: Biggest Increase in 45 Months

July 14, 2016

by Doug Short

Today's release of the June Producer Price Index (PPI) for Final Demand came in at 0.5% month-over-month seasonally adjusted, up from 0.4% in May. This is the largest seasonally adjusted MoM increase since September 2012, 45 months ago. It is up 0.3% year-over-year, up from 0.0% in the previous month. Core Final Demand (less food and energy) came in at 0.4% MoM, up from 0.3% the previous month and is up 1.3% YoY. The forecasts were for 0.3% headline and 0.1% core.

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

The Producer Price Index for final demand increased 0.5 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices rose 0.4 percent in May and 0.2 percent in April. On an unadjusted basis, the final demand index advanced 0.3 percent for the 12 months ended in June, the largest 12-month increase since moving up 0.9 percent in December 2014. (See table A.)

In June, the advance in the final demand index was led by prices for final demand services, which rose 0.4 percent. The index for final demand goods advanced 0.8 percent.

Prices for final demand less foods, energy, and trade services rose 0.3 percent in June after declining 0.1 percent in May. For the 12 months ended in June, the index for final demand less foods, energy, and trade services increased 0.9 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.