Academic journal article Monthly Labor Review

Producer Prices, 2016: Goods Inflation Returns and Price Increases for Services Move Higher

Academic journal article Monthly Labor Review

Producer Prices, 2016: Goods Inflation Returns and Price Increases for Services Move Higher

Article excerpt

Using data from the Producer Price Index program, this article describes changes in producer prices in 2016. Prices in the goods-producing sector saw substantial gains, reversing 2015 declines, and prices in the service-providing sector advanced faster than they did in 2015.

The Producer Price Index (PPI) measures the average change over time in selling prices received by domestic producers for their output. The Final Demand--Intermediate Demand (FD--ID) aggregation system, the main structure used to analyze the behavior of producer prices, measures final-demand inflation (price changes for goods, services, and construction sold for personal consumption, as capital investment, to government, and for export) and intermediate-demand inflation (price changes for goods, services, and construction sold to businesses as inputs to production). Using the FD--ID system, this article describes PPI price movements in 2016. (1)

Overview

Figure 1. Producer price indexes for total final demend, goods, and
services 12-month percent change, 2015 and 2016

              2015  2016

Final demand  -1.1  1.6
Goods         -3.8  1.9
Services       0.2  1.5

Source: U.S Bureau of Labor Statistics.

Note: Table made from bar graph.

Producer inflation returned in 2016, as the PPI for final demand advanced 1.6 percent after declining 1.1 percent in 2015. Over two-thirds of this upturn can be traced to prices for final-demand goods, which rose 1.9 percent after decreasing 3.8 percent a year earlier. Within the goods-producing sector, a 5.9-percent increase in prices for final-demand energy, following a 16.4-percent drop in 2015, accounted for more than 60 percent of the upturn in the index for final-demand goods. In addition, the index for final-demand goods other than foods and energy moved up 1.7 percent in 2016, after inching down 0.1 percent in 2015, and price declines for final-demand foods slowed to 1.1 percent, down from 5.2 percent a year earlier. (2) (See figure 1 and table 1.)

In the service-providing sector, a larger rise in the index for final-demand services less trade, transportation, and warehousing--a rise of 2.0 percent in 2016, compared with 0.8 percent in 2015--accounted for over half of the acceleration in prices for final-demand services, which climbed 1.5 percent in 2016, after inching up 0.2 percent in the preceding year. Also contributing to the faster rate of increase were margins for final-demand trade services, which moved up 1.0 percent after no change in 2015, and the index for final-demand transportation and warehousing services, which remained unchanged after a 3.5-percent decrease in 2015. (Trade indexes measure changes in margins received by wholesalers and retailers. (3))

The index for final demand less foods, energy, and trade services rose 1.7 percent in 2016, after advancing 0.3 percent in 2015. Historically, the indexes for food, energy, and trade services have exhibited greater short-term volatility than other components of the FD--ID system. As a result, PPI calculates a number of indexes that exclude these potentially volatile components. (4)

Similarly to final demand prices, prices for intermediate-demand goods turned up in 2016, after falling a year earlier, and prices for intermediate-demand services rose more than they did in 2015. The index for processed goods for intermediate demand advanced 1.8 percent, reversing a 6.6-percent decline in the preceding year, because of upturns in prices for processed energy goods and processed core goods. The index for processed foods and feeds was little changed in 2016, after seeing a large drop in 2015. Similar shifts in prices for unprocessed energy materials, unprocessed core goods, and unprocessed foodstuffs and feedstuffs caused prices for unprocessed goods for intermediate demand to increase after falling a year earlier. Within intermediate-demand services, the inflation rate rose to 2.5 percent in 2016, up from 0. …

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