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The Key Benefits of using Producer Price Index (PPI)

Market Place — Thu, 25 Mar 2021 08:27:39 +0000

Known as the Wholesale Price Index from the time of its inception till the late 1970s, the Producer Price Index (PPI) and the Consumer Price Index both have extrapolative value and are used to define various economic facets. However, it is important to note that the consumer price index solely emphasizes on consumer spending and on the standard of living of consumers. The producer price index, on the other hand, focuses on the costs of manufacturing goods for a market.

For example, the producer price index negates previous editions of products, such as cars, when it is revealed that newer models are to be introduced or already have been introduced. The producer price index also negates other factors like sales, excise taxes and distribution expenses and instead includes the costs of durable goods which play a key role in production. Here are some of the most important benefits of using a producer price index:

Accurate Measuring of Inflation

People hold a sudden increase or decrease in the cost for consumer goods as a major reason for inflation in an economy. The PPI can measure the inflation’s real growth along with the reduction in total output of an economy, while the consumer price index solely considers factors pertaining to the demand and supply in the economy. The producer price index can be utilized to minimize or eliminate the effect of consumer market inflation on alterations in price and measurements.

Rather, the PPI can be used to accurately gauge the inflation rate by taking into account the price of goods, whether that price increases or decreases and when the goods are sent for distribution.

Predictive Value on Retail Changes

As you know the consumer retail price index indicates the prices of products when they reach the marketplace. And because the PPI gauges the cost of goods before they are released in the market, ready to be consumed, you can say that it can have a projecting value directly concerning their retail prices.

Contract Negotiations

Longer sales agreements involve escalation passages pertaining to the consequences of inflation and how it alters the markets. The PPI can significantly aid in the negotiation of those clauses due to the fact that it can correspond to an independent measurement of price alterations.

The Two Main Uses of the PPI

A Good Economic Indicator

The producer price index can identify various price alterations and changes before the goods enter the marketplace. Therefore, the PPI comes in considerably handy for the government to formulate adequate fiscal and monetary policies.

As a Form of Deflation

Producer price index can be also used to balance other economic time series for price alterations and to interpret those numbers into inflation free currency. For instance, continuous dollar gross domestic product information can be calculated using the information from the PPI.

The product price index cannot be used to calculate the standard of living or any other factor pertaining to the consumer. It takes a couple of days after the PPI is released for the CPI to be revealed. The producer price index uses a standard year in which the CPI is calculated, and each year is compared with the initial year, with the value 100 assigned to it. However, for the product price index, the base year is 1982. Alterations in the producer price index only reflect on percentages, because the minimal changes can be at times ambiguous as the initial number can be greater than 100.

What Can It Do For Investors?

The biggest advantage of the PPI for investors is its power to forecast the consumer price index. According to the theory of producer price index, a majority of price increments that retailers experience will in turn affect the consumer. The consumer price index can provide an affirmation to this situation.

Due to the fact that the consumer price index is a good inflation detector in any economy, most investors would make every attempt to grasp any information pertaining through the producer price index. However, this comes as no surprise to the Federal Reserve and it reviews the reports keenly in order to paint a clearer picture pertaining to the future policies that will be designed to combat inflation.

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German Business Confidence Rises in February: Ifo

Market Place — Tue, 24 Feb 2015 07:00:52 +0000

German business confidence improved again in February, rising for the fourth consecutive month in the latest sign Europe’s largest economy was recovering from last year’s third quarter slump.

The business climate index, which is derived from a monthly survey of 7,000 companies, rose to 106.8 from 106.7 in February, the Munich-based Ifo Institute reported on Monday. Economists forecast a bigger rise to 107.7.

The assessment of the current business climate improved further in February, rising to 102.5 from 102.0. The current assessment index declined slightly to 111.3 from 112.7.

“Satisfaction with the current business situation decreased somewhat, but companies expressed greater confidence in future business developments,” said Ifo president Hans-Werner Sinn in a press release. “The German economy is proving robust in the face of geopolitical uncertainty.”

Business conditions improved somewhat in manufacturing, with the six-month business outlook reaching its highest level since August 2014. Business conditions in wholesaling and construction deteriorated slightly this month, Ifo data showed.

The figures provided added assurance that Europe’s largest economy was regaining momentum despite geopolitical uncertainties, euro area deflation and the growing threat of a Greek default.

Germany’s gross domestic product rebounded sharply in the fourth quarter of last year, growing 0.7 percent. That was more than double the rate of forecasts and well above the Q3 rate of just 0.1 percent. Year-on-year, Germany’s economy grew 1.6 percent. The Federal Statistics Office will release updated fourth quarter GDP figures on Tuesday.

According to analysts, Germany is on pace for around 0.4 percent quarterly growth in the first three months of 2015, having benefited from cheap oil and a weaker euro. However, the German economy is expected to remain subdued this year, according to a January forecast by the International Monetary Fund. The international lending institution said it expects Germany to grow only 1.3 percent in all of 2015, followed by a 1.5 percent growth pace next year. By comparison, euro area growth will average only 1.2 percent this year and 1.4 percent next year.

Eurozone GDP disappointed in the fourth quarter, growing only 0.3 percent quarter-on-quarter. France expanded only 0.1 percent, while Italy stagnated and Greece slipped back into contraction.

The euro was back on its heels Monday, touching an intraday low of 1.1294 US. It would subsequently consolidate at 1.1323 US, declining 0.5 percent.

The euro also declined against the British pound, falling 0.65 percent to 0.7348 GBP.

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Greece, Troika Resume Talks Following Eurogroup Breakdown

Market Place — Mon, 16 Feb 2015 07:00:29 +0000

Greece and its Troika of international lenders resumed talks on Friday after the Hellenic Republic failed to reach an agreement with its European partners at Wednesday’s ministerial meetings.

Talks between Greece and Eurozone finance ministers broke down on Wednesday after both sides failed to reach a political agreement on how to keep Greece financed past February. According to Eurogroup President Jeroen Dijsselbloem, no “common ground” was reached that would allow both sides to move forward.

“We need a political decision before the financial institutions can get to work. We might make the final progress we need at next Monday’s Eurogroup meeting,” Dijsselbloem said after Wednesday’s Eurogroup meetings.

The newly appointed Greek government headed by Alexis Tsipras has vowed to renegotiate his country’s €240 billion bailout plan and put an end to “cruel” austerity. His far-left Syriza party successfully campaigned on the platform of “anti-austerity,” promising its voters to raise the minimum and cut taxes. Syriza secured 149 of 300 seats in the Hellenic Parliament in January’s snap elections.

Monday’s ministerial meetings could be the last moment for the newly elected Greek government to ask for an extension of the current bailout program, which expires February 28. Mr. Tsipras said on Monday his country would not seek an extension of the current bailout, but would instead focus on finding a new agreement. Given the breakdown in talks on Wednesday, the Greek government may seek a “technical” extension to shore up support for broader reforms in the future. Sources close to the talks suggest Greece could ask for a longer bridge loan through August to cover the government’s immediate funding needs.

Despite suffering an immense economic collapse during the Great Recession, Greece is still part of the Eurozone’s long term plan, a sign European lawmakers are willing to consider relaxing some of the bailout terms. Greece’s exit from the Eurozone, it is feared, could trigger a mass exodus from the fledgling currency union.

In economic data, Greece’s economy shrank once again in the fourth quarter, official data revealed today. Greece’s gross domestic product declined 0.2 percent quarter-on-quarter, following an increase of 0.7 percent in the July to September period.

Meanwhile, the Eurozone economy expanded 0.3 percent in the fourth quarter, following a 0.2 percent increase in the second quarter. A median estimate of economists called for an increase of 0.2 percent. In annualized terms, Eurozone GDP expanded 0.9 percent, official data showed.

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Australian Dollar Loses Traction Ahead of Employment Figures

Market Place — Thu, 12 Feb 2015 07:19:19 +0000

The Australian dollar declined against its US counterpart Wednesday despite stronger than forecast consumer confidence and home loans figures, as the markets shifted their attention to Thursday’s employment report.

The Aussie fell back toward 77 cents US on Wednesday after attempting a re-test of the 78-cent level in the overnight session. The AUD/USD consolidated at 0.7705, declining 0.86 percent. The pair faces initial support at 0.7690 and resistance at 0.7826.

In economic data, Australia home loans rose faster than forecast in December, raising concern the country’s housing market was overheating. Home loans increased 2.7 percent in December, following a 0.4 percent drop the previous month, the Australian Bureau of Statistics reported Wednesday.

The value of investor loans rose 6 percent to a record AUD $12.56 billion, well above the average monthly increase of 2.6 percent over the last six months.

On Tuesday Westpac said Australian consumer confidence rose briskly in February, as falling energy prices lifted optimism about family finances and the overall economy. The consumer confidence index rose 8 percent to 100.7, a 13-month high.

The ABS will release January employment data on Thursday. The Australian economy added 37,400 total jobs in December, following a gain of 45,000 in November, rounding out the strongest two-month period of job creation in eight years. Full-time employment soared by 41,600 in December, while the unemployment rate dropped to 6.1 percent from 6.2 percent.

Despite a more robust job market, the Reserve Bank of Australia last week cut interest rates for the first time in 18 months, setting the stage for another rate cut in the next several months. The central bank also lowered its 2015 growth and inflation forecasts and said unemployment will rise, underscoring the need for more accommodative monetary policy.

According to the revised forecast, the Australian economy will expand between 1.75 percent and 2.75 percent this year, down from the previous estimate of between 2 percent and 3 percent. Consumer inflation is forecast to slow to 1.25 percent in the year through June.

The RBA has long held that the Australian dollar is overvalued, giving policymakers plenty of scope to drive down interest rates. The AUD/USD has declined nearly 6 percent since the start of the year and is expected to fall below 75 cents in the short-term. According to BlackRock, the world’s largest asset manager, the Aussie will bottom out below 70 cents US in the first half of 2015.

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EUR/USD Holds Ground as Political Tensions Escalate

Market Place — Tue, 10 Feb 2015 07:00:53 +0000

The euro was little changed against the US dollar on Monday, trading above 1.13 cents US ahead of the European Union meetings in Brussels. The meetings, which will be held on Wednesday, will be attended by newly appointed Greek Prime Minister Alexis Tspiras and German Chancellor Angela Merkel.

The EUR/USD climbed 0.06 percent to 1.1326. The pair is likely supported at 1.1259. Resistance is ascending from 1.1435.

Risk-off trading was the norm on Monday, as investors digested latest comments from the newly appointment Greek Prime Minister, who on Sunday outlined plans to dismantle the Troika’s “cruel” austerity plan. Tspiras said he would not extend Greece’s €240 billion bailout plan set to expire at the end of the month, setting the stage for a political standoff with the country’s European lenders.

European Commission President Jean-Claude Juncker fired back on Monday, telling Greece the supranational institution would not bow to its demands.

“Greece should not assume that the overall mood has so changed that the Eurozone will adopt Tspiras’ government program unconditionally,” Juncker said in Germany on Monday.

Tspiras’ far-left coalition swept to power last month on a platform of “anti-austerity,” promising voters to raise the minimum wage, cut taxes and negotiate a new bailout agreement with international creditors. The Syriza party secured 36 percent of the vote and 149 of 300 parliament seats.

Meanwhile, escalating violence in Ukraine continued to weigh on market sentiment, driving investors to safe haven assets like the Japanese yen and gold. At least 45 Ukrainian soldiers and 11 pro-Russia fighters have been killed in renewed violence in the eastern part of the country, prompting the EU to postpone Russia sanctions ahead of the Minsk summit. German Chancellor Angela Merkel arrived at the White House on Monday to meet with US President Barrack Obama around the issue of whether to arm the Ukrainian government against Russian separatists.

In economic data, Germany’s trade surplus widened more than forecast in December, capping off a record year for international trade and signaling that Europe’s largest economy was improving. Germany’s trade surplus reached €217 billion in 2014, shattering the previous record of €195.3 billion. The country posted a surplus of €21.8 billion in December, up from €18.3 billion in November and compared with the consensus forecast of €17.9 billion. Exports rose 3.4 percent, while imports declined 0.8 percent from November, official data showed. Economists forecast exports to rise only 1 percent in December.

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Euro rallies as technical trading outweighs German deflation

Market Place — Fri, 30 Jan 2015 07:00:38 +0000

The EUR/USD rallied on Thursday, as technical trading sent the pair higher amid mixed economic data from Germany.

The EUR/USD regained 1.13 and climbed to an intraday high of 1.1367. It would later consolidate at 1.1320 in the North American session, advancing 0.4 percent. Initial support is likely found at 1.1253 and resistance at 1.13355. The EUR/USD could sustain a larger rebound above the initial resistance test as the RSI climbs off oversold levels.

Technical trading supported the euro despite plunging German inflation, which highlighted even more so the downside risks facing the Eurozone economy. Germany’s consumer price index of goods and services declined more than forecast in January, plunging 0.3 percent annually.

Germany’s harmonized CPI rate, which calculates inflation using a method consistent throughout the European Union, declined 0.5 percent annually, the biggest drop in more than five years.

The European Central Bank last week joined a growing list of central banks that have eased monetary policy this month to account for deflationary risk. The ECB introduced its long-awaited quantitative easing program last Thursday, announcing it would begin buying government bonds worth €60 billion per month. The QE program, which is expected to last until at least September 2016, could inject up to €1 trillion into the Eurozone economy.

The EUR/USD plummeted to fresh 12-year lows following the news and risks further downside action as the markets brace for weaker inflation figures and diverging central bank policies between the ECB and United States Federal Reserve.

In a separate report today Germany said its unemployment rate fell in January to its lowest level in more than two decades, a sign Europe’s largest economy was gradually improving despite regional imbalances. Germany’s unemployment rate fell to 6.5 percent in January, down from 6.6 percent a month earlier. That was the lowest level since the reunification of East and West Germany in 1990.

An improving labour market and cheaper gas prices are lifting German consumer sentiment, according to GfK. The market research firm’s monthly consumer confidence index reached 9.3 in February, a 13-year high.

“Consumers are expecting the German economy to continue developing positively over the coming months,” GfK reported on Wednesday in a press release.

It added, “Falling energy prices will play a major role in this respect. Low energy prices combined with a considerable depreciation in the euro are acting as an economic stimulus and should boost not only exports, but also companies’ willingness to invest.”

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