Friday, December 2, 2011
Eurostat released the October data point for their industrial producer price index (PPI: an index that tries to track average prices paid for all inputs by European industrial concerns - excluding construction). As you can see it has been rising, but more slowly during the period this year that European unemployment is rising and retail trade contracting. The index excluding energy contracted very slightly in October.
PPI is not declining yet as it did in 2008. However, there is some indication that it was a lagging indicator in 2008 - the peak in the index including energy was in July, while excluding energy it peaked in September. By contrast, we discussed industrial orders the other day and that series peaked at the end of 2007 or in spring of 2008 and was in free fall between June and September when PPI was peaking:
Whether things will play out the same this time is less clear - in particular oil prices have been broadly declining in the second half of 2011 rather than rising as they were through 2007 and the first half of 2008. However, in general it makes sense that when final demand is disrupted (eg due to a credit crunch) that would show up first in orders for finished goods. Only after orders for goods currently in manufacture are fulfilled would it translate into prices for intermediate goods and eventually raw materials. That is clearly a process that could take a number of months, so perhaps it's reasonable that PPI is not falling yet, given that industrial orders have just begun to fall (and we don't know at this stage how far the latter will fall).
On the third hand, futures markets will of course do their best to anticipate what demand for producer inputs will be and will translate that into spot prices. The fact that this is not happening more strongly in the PPI is evidence that most futures market participants are not yet convinced that a significant slowdown is inevitable (just as they similarly weren't convinced in early 2008).