Thu Jan 08 04:00:00 CST 2015

Consensus Actual Previous Revised
Month over Month -0.1% -0.3% -0.4% -0.3%
Year over Year -1.4% -1.6% -1.3%

Producer prices (ex-construction) were weaker than expected in November. A 0.3 percent monthly drop matched October's shallower revised decline and means that overall prices have now fallen in four of the last five months. Annual PPI inflation was minus 1.6 percent, down three ticks from last time and has now been in negative territory for some sixteen months.

Energy prices inevitably had a negative impact on the headline index, falling 0.7 percent from October to stand 5.0 percent lower on the year after a 4.1 percent annual drop at the start of the quarter. Excluding this category the PPI was 0.2 percent lower versus both October and November 2013. Elsewhere in the basket intermediates were off 0.3 percent on the month, and consumer non-durables 0.1 percent. Capital goods and consumer durables were flat.

Regionally national PPIs fell in all member states apart from Germany (flat on the month) and Slovakia (up 0.3 percent). The steepest declines were in Greece and Cyprus (1.4 percent) followed by Ireland (1.3 percent).

Annual HICP inflation provisionally fell below zero last month and today's deflationary update on pipeline pressures warns that, in the absence of a major policy stimulus, it could stay there for some considerable time.

The producer price index (PPI) is a measure of the average trading price of products and covers manufacturing, mining and quarrying and electricity, gas and water supply. The index is calculated excluding the construction sector.

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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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 taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.