Wednesday, June 16, 2010

Producer Price Index (PPI) and Crude Nonfood Materials Less Energy

The Producer Price Index measures changes in prices that manufacturers and wholesalers pay for goods during various stages of production.  There are three important sub-groups that measure price changes at each stage in production: crude goods, intermediate goods, and finished goods.  We like to look at all three stages because a price increase (or decrease) can be seen further down the stage in production and will ultimately be passed on to the consumer.  Early signs of inflation that show up in the PPI eventually make there way (6 to 9 months) into the CPI.

The PPI for Finished Goods in May edged down 0.3 percent.   
(Table 1. Producer price indexes and percent changes by stage of processing)

If we skip straight to crude nonfood materials less energy (very bottom of the table) we see a (not seasonally adjusted) 40.8% increase in prices since May 2009.  Generally prices for this group have proven to be very sensitive to economic turning points.  As an economy gears up production, commodities (timber, demand for metal, ect.) tend to increase in price very early in the expansion process.  The opposite occurs when the economy contracts and we see commodity prices fall months before an economy enters recession as purchases slow and unsold inventories accumulate.

No comments:

Post a Comment