The Finatical
Week of September 6th, 2022 - Producer Price Index, Payrolls Rise, Home Prices Drop
Topic Breakdown - Producer Price Index
Introduction
The producer price index (PPI) tracks the average change in the prices domestic producers get for their product, over a certain period of time. It is an inflation indicator derived from many sources tracking producer prices by industry and product type. The US Bureau of Labor Statistics publishes the index monthly. Essentially, the Producer Price Index tracks changes in the prices paid to US manufacturers and service providers. Now that you know a little about what the Producer Price Index is, we can begin to understand how we can use it and learn about the Consumer Price Index in relation to the PPI.
Its Meaning
PPI is a measure of inflation from the standpoint of the producer, and if manufacturers are confronted with inflation, the cost of items for consumers such as ourselves will fluctuate. Every customer is affected by changes in the price of items, whether they are purchasing simple goods like milk and eggs or a sizable item that is particularly sensitive to interest rates. As a result, inflation-related data is one of the few releases that directly affects our daily expenses. In essence, the producer price index (PPI) assesses inflation from the standpoint of costs to industry or product manufacturer so some consider it an earlier predictor of inflation than the CPI since it captures price increases before they reach consumers. A rise in the PPI indicates that consumer prices will rise soon. In comparison, the decline in PPI indicates that goods and services are devalued. This is a sign of an impending economic collapse.
Its Relation to the Consumer Price Index
So far, we have only been looking at the price index at the producer level, but to grasp this concept fully, we should also investigate the consumer price index. The CPI is a little more relevant to the average consumer, and can be analyzed in conjunction to the PPI. Both the Producer Price Index and the Consumer Price Index are vital economic gauges because they indicate periodic pricing fluctuations. However, they reflect pricing from two different viewpoints. The producer price index, as previously stated, evaluates prices based on the first trade contract for a product or service. In contrast, the consumer price index (CPI) reflects price fluctuations experienced by consumers. Also, PPI is calculated without taking into account sales and excise taxes. The fee collected for products, on the other hand, is included in the CPI. As well as this, while the Producer Price Index considers the price of items on a certain date, the Consumer Price Index considers the price during the first eighteen working days of the month. Finally, the basic purpose of the CPI is to adjust income and expenditure. The fundamental purpose of the PPI is to deflate income sources, which aids in measuring production growth.
Financial Trends
Payrolls Rise Despite A Slow Economy
Despite a slow economy, nonfarm payrolls significantly increased in August, but unemployment rates increased as more labor workers decided to join the labor force. According to a report by the Bureau of Labor Statistics, the economy added a resounding 315,000 workers in the month, which was just under the Dow Jones estimate of 318,000 workers. Unfortunately, the unemployment rate rose to 3.7%, which is a two-tenths of a percentage higher than original expectations, mainly because of growth of the participation rate in the labor force, 62.4%, tied for the highest level in the year. Wages have continued to increase as well, but below projections and expectations. The average hourly earnings workers increased by 0.3% for the month, resulting in laborers being somewhat satisfied.
Professional and business services led the economy in payroll gains, with 68,000, followed by the healthcare and retail industry with 48,000 and 44,000, respectively. Markets reacted positively to the growth in payroll numbers in each industry, with major stock market indexes posting strong gains and treasury yields dropping. However, the increase in payrolls has posed a quandary for the Federal Reserve trying to get inflation under control. As inflation has been reaching its highest pace in over 40 years, the labor market has been able to withstand inflation even as other aspects of the economy have weakened.
Home-sellers DropHome Prices
As the housing market is starting to cool down from its initial hot-prices at the start of the year, home sellers are starting to get nervous about their return on investment and sales prices of their beloved homes. More than 20% of home sellers dropped their asking prices in August, compared to merely 11% of home sellers dropping their asking price last year. The average home in the U.S. sold for less than its original listing price for the first time in the housing market in over 17 months. Currently in the housing market, homes are not selling at the rapid pace that they were six months ago, when the strong demand for houses was coupled with limited supply. Throughout August, homes sat on the market for an average of five days longer than they did a year ago — the first annual increase in time on the housing market in more than two years.
There is good news for home buyers, as the supply of homes for sales is also rapidly increasing, nearly 27% from last year, despite fewer home sellers deciding to list their homes for sale. As mortgage rates have been gradually rising since January, with a record in June, they are continuing to increase in September. Redfin has reported that the requests for home tours and other home buying services from theri agents at the end of August was down 16% from the year before.
Financial Guidance
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” — Abraham Lincoln
The execution of any plan you have is important, but the most important part of the process is the preparation that comes before the carrying out of the plan. Great preparation allows you to establish a solid base upon which you can carry out anything you plan, and this is something isn’t limited to economics, finance, or investing. This applies to anything you pursue in life.
Term of the Week
Dow Jones - Also called the Dow Jones Industrial Average (DJIA), it is a stock market index similar to the S&P. It takes into the consideration the stock prices of the 30 most influential companies traded on the Dow. While it can serve as a general indicator of the stock market, it must also be noted that there is a limitation on the fact that only 30 companies are accounted for within the index, so it is a good idea to take into consideration other indexes such as the S&P 500.