The revamped PPI showed prices for goods, services and construction for final demand rose 0.2 percent in January. Although short on history, the new final demand index indicates inflation remains low.
The Producer Price Index Overhauled
Today’s release of the Producer Price Index marks the official transition from the Stage of Processing (SOP) system to the new Final Demand-Intermediate Demand (FD-ID) report. Under the FD-ID system, coverage of producer prices has more than doubled. Rather than only capturing prices for goods, the new PPI also includes prices for domestically produced services and construction as well as prices for items sold to thegovernment or exported overseas. So, what does this new PPI system tell us about current inflation?
Prices for Final Demand Edge Higher
The final demand index has replaced the finished goods index as the headline number for the PPI—the first change since 1978. In January, prices for final demand advanced 0.2 percent. With services now accounting for about 64 percent of the final demand index, volatility in food and energy prices should wreak less havoc on the headline. However, final demand goods prices led the headline higher this month, driven by a1.0 percent jump in food prices. Prices for final demand services inched up a more modest 0.1 percent. Core final demand prices ticked up 0.2 percent and are up only 1.3 percent over the year.
For the PPI traditionalists, the finished goods index rose 0.6 percent in January, again largely driven by food prices. Energy prices were relatively tame, held down by a drop in gasoline prices. Ex-food and energy, prices rose 0.5 percent on the heels of hikes to pharmaceuticals, residential electricity and natural gas prices.
The PPI for personal consumption, which measures the prices business receive for sales of consumer goods and services, rose 0.3 percent over the month. The data for the PPI personal consumption index only begins in late 2009, but it has thus far done a decent job of tracking the Consumer Price Index despite a number of coverage and technical differences. Therefore, some pickup in prices paid by consumers may be in store as businesses test higher prices at the beginning of the year.
Input Prices Show Only Modest Cost Pressures
The FD-ID system for producer prices has also enhanced the way input prices for businesses are measured. Two parallel treatments of intermediate prices are offered. We look at the stage of processing system to gauge input prices further down the pipeline. Input prices for the final stage of processing—Stage 4—rose 0.2 percent in January. However, having risen just 0.7 percent year over year, the intermediate indices shows only modest price pressures for producers.
Wells Fargo