The US Bureau of Labor Statistics reported today that the producer price index for final demand remained unchanged in February, after adjusting seasonally. Final demand prices increased by 0.6% in January and 0.5% in December 2024 on an unadjusted basis, the final demand index rose 3.2% in the twelve months to February.
In February, a 0.3% increase in final demand prices offset a 0.2% decline in the final demand services index.
The final demand index, excluding food, energy and commercial services, rose 0.2% in February after rising 0.3% in January. For the twelve months ending in February, final demand prices, excluding food, energy and commercial services, rose 3.3%.
The final demand goods index rose 0.3% in February, the fifth consecutive rise. Final demand food prices led the rise, jumping 1.7%.
The final demand commodities index, excluding food and energy, rose by 0.4%. In contrast, final demand energy prices fell by 1.2%.
Product Details: Two-thirds of the increase in the final demand commodities index in February was attributed to the 53.6% increase in chicken egg prices. Indicators of pork, fresh and dried vegetables, electric power, tobacco products, and carbon steel scrap also rose.
In contrast, gasoline prices fell by 4.7%. Indicators of processed young chickens, and primary organic essential chemicals also fell.
Final Order Services: The Final Demand Services Index fell 0.2% in February, its biggest decline since its 0.2% decline in July 2024. The February decline was attributed to the profit margins of the final order trade services, which fell by 1.0%. (Trade indices measure changes in profit margins obtained by wholesalers and retailers.) On the other hand, prices of final demand services, excluding trade, transport and storage, increased by 0.2%, while the transport and storage services index for final demand stabilized.
Factors affecting the monthly US Core Producer Price Index
There are several factors that may affect the Core Producer Price Index (PPI), which tracks changes in the prices that producers charge for goods and services, with the exception of food and energy. Here are the main drivers:
- Supply chain costs
– Raw material prices: Changes in the cost of raw materials (such as metals and chemicals) directly affect production costs. If input costs rise, producers may move these costs through higher prices.
Labor costs: Wages and employment benefits can increase production costs. When labor costs rise, companies may charge higher fees for their products.
- Producer Request
– High demand: When demand for goods and services increases, producers may raise prices, leading to higher PPI readings.
– Utilization of production capacity: When producers work near full production capacity, this limits supply, which can lead to higher prices due to shortages or delays.
- Market competition
Competitive pressures: In highly competitive markets, producers may be less able to pass on higher costs to buyers. On the other hand, monopolistic or less competitive industries may increase prices more freely.
- Trade policies and tariffs
Tariffs and import/export restrictions: Trade barriers can increase the cost of imported goods used in production, raising producer prices. For example, tariffs on steel may increase costs for car manufacturers.
- Currency exchange rates
Exchange rate fluctuations: A weaker local currency increases the cost of imported goods and materials used in production, which can lead to higher prices of final goods. Conversely, a strong currency could lower the cost of imports.
- Inflation expectations
If producers expect higher inflation in the future, they may proactively increase prices to cover projected costs, affecting the core PPI.
How does the monthly US Core Producer Price Index affect traders’ decisions?
The US Core Producer Price Index (M/M) is an important economic indicator used by traders to measure wholesale inflation. It measures the change in the prices of goods and services sold by producers, excluding food and energy, on a monthly basis. Here’s how traders use the core producer price index (M/M) to make decisions:
- Inflation expectations
The core producer price index (M/M) provides insight into future consumer inflation, where higher producer costs can be passed on to consumers. When the PPI rises more than expected, it signals higher inflation, leading traders to anticipate possible changes in monetary policy (e.g., interest rate hikes).
- Impact on interest rates
Central banks such as the Fed are keeping a close eye on inflation data. If the core PPI shows flat inflationary pressures, traders may expect the Fed to adopt a tighter stance, leading to higher interest rates. This affects the forex market, causing the US dollar to strengthen due to higher interest rate expectations.
- Market sentiment
Higher-than-expected core PPI data usually triggers a negative reaction in the stock market, as rising inflation erodes corporate profits and may lead to higher borrowing costs. Conversely, a lower-than-expected core PPI can boost stock prices by reducing inflation concerns.
- Forex Market Impact
– The US dollar often reacts strongly to the releases of the core PPI. If the data is higher than expected, traders may expect a tougher monetary policy, making the dollar more attractive, while a lower figure may weaken the dollar.
- Bond Market
– Traders in the bond market are keeping a close eye on the core PPI, as higher inflation data depreciates fixed-income securities.
