Fri Jan 30 01:45:00 CST 2015

Consensus Actual Previous
Month over Month -0.5% -0.9% -0.1%
Year over Year -2.9% -2.0%

Producer prices dropped fully 0.9 percent on the month in December. The steeper than expected decline came after an unrevised 0.1 percent dip in November and reduced annual PPI inflation to minus 2.9 percent, its weakest mark in five years.

Refined petroleum product prices followed November's 5.1 percent monthly slump with a near-15 percent nosedive although the impact here was partially offset by a 0.5 percent rise in the cost of products from the extractive industry and utilities. Elsewhere, electrical equipment and machinery rose 0.1 percent as did transport materials but food, drink and tobacco decreased 0.2 percent and the other products category posted a 0.3 percent fall. Manufactured products were off 0.2 percent.

Annual CPI inflation was just 0.1 percent in December and today's data suggest that a sub-zero print this month is all but inevitable.

The producer price index (PPI) is a measure of the average transaction price, exclusive of VAT, for goods from industrial activities sold on the French market.

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.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The output price indexes measure change in manufacturer' goods prices produced and often are referred to as factory gate prices. Input prices are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day operations.

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.