Fri Feb 20 01:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.5% -0.6% -0.7%
Year over Year -2.0% -2.2% -1.7%

Producer prices (ex-construction) were slightly weaker than expected in January. A 0.6 percent monthly decline was the third fall since September and left the headline PPI 2.2 percent lower on the year, its steepest drop since February 2010.

Energy costs were down a further 2.0 percent versus December and show a yearly slide of 6.3 percent. Excluding this category the PPI dipped just 0.1 percent on the month but, at minus 0.6 percent, its annual rate of decline still quickened compared with its minus 0.4 percent year-end pace.

Elsewhere, capital goods rose a monthly 0.2 percent but consumer goods were down 0.1 percent and basics tumbled 0.4 percent.

The downward trend in producer prices began back at the start of 2013 and the headline index has recorded a 3.2 percent drop over this period. The core component has held up better but weakness here is becoming increasingly well established and the risks of second round effects continue to build. There is nothing here to suggest that German CPI inflation (February update due next week) will be moving back above zero any time soon.

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.