Econoday Economic Report: Producer Price Index August 18, 2009

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Producer Price Index

Released On 8/18/2009 8:30:00 AM For Jul, 2009

	Prior	Consensus	Consensus Range	Actual
PPI - M/M change	1.8 %	-0.3 %	-0.7 % to 0.1 %	-0.9 %
PPI -Yr/Yr change	-4.7 %			-6.4 %
PPI less food & energy - M/M change	0.5 %	0.1 %	0.0 % to 0.2 %	-0.1 %
PPI less food & energy - Yr/Yr change	3.4 %			2.6 %

Highlights
Inflation at the producer level in July declined sharply on both declines in food and energy. And the core rate was nudged down by lower prices for light trucks. The overall PPI dropped 0.9 percent after spiking 1.8 percent in June. The decline in July was greater than the market forecast for a 0.3 percent dip in the headline PPI. The drop in the latest month was led by a 2.4 percent decrease in energy with food prices declining 1.5 percent. Meanwhile the core PPI rate eased sharply to 0.1 percent dip, following a 0.5 percent surge in June. The consensus had expected a 0.1 percent rise.

The July drop in energy prices was not due to gasoline but to a 10.2 percent plunge in heating oil costs. Gasoline prices actually rose 3.3 percent while residential electricity was unchanged.

The core rate in July eased largely on a 0.7 percent drop in prices for light trucks. Passenger car prices edged up 0.1 percent. However, the July PPI numbers were collected prior to the cash for clunkers program.

For the overall PPI, the year-on-year rate fell to minus 6.4 percent from minus 4.3 percent in June (seasonally adjusted). The core rate year-ago pace declined to up 2.6 percent from up 3.4 percent the prior month. On a not seasonally adjusted basis, the year-ago decline for the headline PPI was 6.8 percent while the core was up 2.6 percent.

With energy prices rising in recent weeks and auto credits ending soon, the July PPI may be the best we see for a while. But today's numbers should be favorable for bond prices.

Market Consensus before announcement
The producer price index in June jumped sharply at the headline level due to higher energy costs, spiking 1.8 percent in June, after increasing 0.2 percent in May. The energy component surged 6.6 percent while the food component also posted a large gain of 1.1 percent. Meanwhile the core PPI rate increased 0.5 percent, boosted by a 2.0 percent jump in auto prices and a 3.4 percent surge in light truck prices. July should be quite soft with energy prices likely down and motor vehicle prices possibly back down.

Definition
The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measure the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. The headline PPI (for finished goods) is a measure of the average price level for a fixed basket of capital and consumer goods for prices received by producers. Why Investors Care

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.
Data Source: Haver Analytics

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.
Data Source: Haver Analytics

2009 Release Schedule

Released On: 1/15 2/19 3/17 4/14 5/14 6/16 7/14 8/18 9/15 10/20 11/17 12/15

Release For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov