Tue Jan 20 01:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.4% -0.7% 0.0%
Year over Year -1.4% -1.7% -0.9%

Producer prices were weaker than expected in December. A 0.7 percent monthly fall followed an unrevised flat performance in November and steepened the PPI's annual rate of decline from minus 0.9 percent to minus 1.7 percent. The yearly drop was the sharpest since March 2010.

Energy costs tumbled 1.8 percent versus mid-quarter and were nearly 5 percent below their level in December 2013. Excluding this category prices were down a much smaller 0.2 percent on the month although even this was enough to see the annual underlying rate slide from minus 0.2 percent to minus 0.4 percent.

Elsewhere within the PPI basket capital goods charges were unchanged at their November level but both consumer goods and basics decreased 0.3 percent.

CPI inflation was already running at a 12-month rate of just 0.2 percent at year-end and after December's steepest monthly drop in the PPI since July 2009 it is more likely than ever that it will fall below zero in 2015.

The producer price index (PPI) is a measure of the average price level of raw materials and industrial products produced in Germany. This includes manufacturing, energy and water and mining.

The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction. These price statistics cover both the sales of industrial products to domestic buyers at different stages in the economic process and the sales between industrial enterprises.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.