New U.S. PPI series seen tracking consumer prices over time

WASHINGTON, Feb 18 (Reuters) - A revamped U.S. producer inflation series makes its debut on Wednesday and will offer a comprehensive read on prices received by businesses, which economists say will elevate its status in the financial markets.

The headline Producer Price Index has been broadened to include services, in a nod to the sector's rapid expansion, and will now be referred to as PPI final demand.

The index, previously known as PPI for finished goods, will also include construction.

"As a result, the new more comprehensive PPI will resemble the Consumer Price Index, but at the same time it will be its own alternative measure of economy-wide inflation," said Dana Peterson, an economist at Citigroup in New York.

"The new PPI release will increasingly become a market focus, especially since it is released before CPI each month."

The Labor Department will release the January producer inflation report at 08:30 a.m. (1330 GMT). Its statistics division, the Bureau of Labor Statistics, has been publishing the new series on an experimental basis since December 2009 .

PPI for final demand rose 0.1 percent in December after being unchanged in November. Reuters will not be publishing PPI final demand estimates for January, given the changes.

The first change in the PPI headline number since March 1978 expands coverage by including prices for personal consumption, business investment, government spending and exports.

These additions, under the new final demand-intermediate demand system, more than double the PPI coverage of the U.S. economy, compared to the previous stage of processing system.

With the changes, PPI will cover about 72 percent of services, which will see it likely closely tracking the CPI with the passage of time, economists said.

That should also make the new series less volatile on a month-to-month basis.

"Over time you should begin to see a better correlation between PPI and CPI," said Omair Sharif, senior economist at RBS in Stamford, Connecticut.

"The problem with trying to use PPI in the old days to do the CPI was, outside of a few individual components, the broader indices didn't move together at all. Now it should be a better gauge of any potential pass-through to the CPI."

With the introduction of services and construction, core PPI, final demand less food and energy, now accounts for about 88 percent of the headline index compared to roughly 59 percent in the old aggregation system. Weights for food and energy have been significantly reduced in the new index.

"The diminished share of food and energy prices in the PPI results in a less volatile headline index," said Jimmy Coonan, an economist at JPMorgan in New York.

The PPI report will also feature an even broader gauge of core producer prices - final demand less foods, energy, and trade services.

Accounting for about two-thirds of final demand, economists believe that, over time, it could become the preferred core rate measure for producer prices. The new system will also include prices for intermediate demand.

"It provides a useful gauge of developing price pressures on downstream prices," said Coonan.