1. Introduction to Producer Price Index:
The Producer Price Index (PPI) measures average change overtime in domestic product prices. PPI is one of the key indicators used to reduce prices when estimating GDP at constant prices, where GDP is compared in a time series after excluding the impact of prices.
The Producer Price Index was launched for the first time in 2010 on a quarterly basis, and later in 2013, it was launched on a monthly basis. The producer prices basket includes the following economic activities:
1. Mining and quarrying; including oil and gas excavation with a 72.7% relative weight.
2. Manufacturing activity, which is produced locally, such as food industry, petroleum refining, iron and steel industry, petrochemicals and other industries; with a 26.8% relative weight.
3. Electricity and Water: namely; power plants, water desalination and purification stations, with a 0.5% relative weight.
Each basic activity falls into subgroups that are classified according to CPC ver. 2. The PPI is calculated by using Laspeyres formula, and the average of 2013 prices as base year, where the weightages (relative importance) of industrial products values are calculated for this year.
The following table shows the relative importance (weights) in the old basket (2006) and the new basket (2013), and also shows the composition and components of the two baskets:
2. Most important features of PPI in Q1, 2016
The Producer Price Index for Q1, 2016 reached 43.5 points, with a decrease of 17.5% compared to the previous quarter (Q4, 2015), and 34.4% compared to the corresponding quarter of the preceding year (Q1, 2015).
It is noteworthy that the three main PPI components after moving the base year to 2013 are:
1. Mining and quarrying, with 72.7% weightage.
2. Manufacturing, with 26.8% weightage.
3. Electricity and Water, with 0.5% weightage.
Thus, PPI is significantly affected by the prices of the Mining Group (Gas and Oil), since Mining Group represents 72.7% of the relative importance of the PPI; and by reaching 37.8 points, it was a major cause of the overall PPI decline to 43.5 points in Q1, 2016. Manufacturing group amounted to 57.6 points due to the decline of Oil prices in this period. Graph(1).
3. Comparing Q1, 2016 to Q4, 2015 (Q-O-Q)
The overall PPI stood at 43.5 points, with a decline of 17.5% compared to the previous quarter (Q3, 2015) as a result of several changes in the prices of the three major groups, namely: -
• Mining:
In Q1, 2016, the prices for this major group fell by 21.2% compared to the previous quarter (Q3, 2015) due to lower oil and natural gas prices.
Given the group’s weightage of 72.7% in the PPI basket, the decline led to a noticeable overall PPI decline in Q1, 2016 compared to Q4, 2015.
• Manufacturing
The Manufacturing Group showed a decline of 10.8% compared to the previous quarter. This group consists of 11 sub-groups. There was an increase in 5 sub-groups and a decrease in other 5 sub-groups, while the “Paper and its Products” remained unchanged.
When comparing Q1, 2016 to Q4, 2015, the “Refined petroleum products” was the highest decline by 14.5%, followed by “Basic Chemical” including fertilizer and Organic Chemical by 7.2%, and third came the “Basic Meatal” sub-group, by 7.0%, followed by “Rubber and Plastic products” by 0.6%. The lowest degree was recorded in “dairy products by 0.1%.
For the five sub groups which noticed increasing prices were: “Other Chemicals products” including paint product by 6.0%, “Prepared and preserved fruit and nuts” by 4.8%, “Soft drink” by 1.5%, “Cement and Non-Metallic Products” by 1.1%, “Grain mill products” by 0.2%.
• Electricity & Water
The prices for this major group increased by 9.5% compared to the previous quarter, due to a 7.7% up in electricity production prices as well as a 12.7% in water production prices. Given the group’s slight weightage in the basket, it had little impact on the overall PPI.
The following graph (2) shows the percentage of change in the overall index of major groups between the third and fourth quarters of 2015:
4. Comparing Q1, 2016 to the corresponding Quarter in 2015 (Y-o-Y):
The PPI for the first quarter of 2016 fell by 34.4% compared to the corresponding quarter of 2015. However, there was a variation in change percentages in the PPI major groups, as shown in the table (2) and graph (3).
• Mining:
The prices for this major group showed a decline of 40.4% due to the declining prices of the “Crude Petroleum and Natural Gas” sub-group by nearly same percentage.
• Manufacturing
The Manufacturing group showed a noticeable decrease of 21.3% between the production prices of Q1, 2016 and the corresponding quarter of 2015, due to various positive and negative changes in the eleven sub-groups products, where four sub-groups recorded an increase, the other six were declined, while stability noticed in “Newspapers and periodicals” group.
Sub-groups witnessing an increase between the two quarters(Y-o-Y):
• Meat, Fish and Fruits increased by 11.6%.
• Cement and Non-Metallic Products increased by 7.5%.
• Soft Drinks and Beverages (including mineral water) increased by 0.4%.
Sub-groups witnessing a decline between the two quarters(Y-o-Y):
Six sub-groups witnessed a varied decline and impacted the overall index, where the “Basic Metals” (Iron - Aluminum) decreased by 24.9%, “Refined Petroleum & Gas Products” declined by 24.5%, and the “Basic Chemicals” by 18.9%.
The other five sub-groups had a small annual decline, where the “Other Chemicals” declined by 0.6%, the “Plastic Products” by 3.3% , and the “dairy products” by 2.3%, and “cement product” by 0.04%.
• Electricity & Water
The prices for this group recorded an increase of 3.6%, as a result of increase of 2.7% in electricity production prices, and 4.9% in water production prices.
The following graph shows the trend of PPI and main groups during a fourth quarter of 2015 to a fourth quarter of 2016.
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