Tue Feb 03 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.7% -1.0% -0.3%
Year over Year -2.5% -2.7% -1.6%

Excluding construction, producer prices continued to spiral down in December. A steeper than expected 1.0 percent monthly drop in overall prices was the fifth decline since the middle of the year and reduced annual PPI inflation from minus 1.6 percent to minus 2.7 percent, its weakest print since December 2009.

Energy costs dropped a further 3.2 percent versus November to stand fully 8.3 percent below their level a year ago. However, even excluding this category prices were down 0.2 percent from mid-quarter and 0.5 percent weaker on the year after only a 0.2 percent annual decline last time.

The sole monthly increase was seen in consumer durables (a minimal 0.1 percent). Elsewhere, capital goods were flat, consumer non-durables slipped 0.1 percent and intermediates were off some 0.5 percent.

Regionally national PPIs saw monthly decreases in all member states bar Estonia (0.3 percent), Cyprus and Slovenia (both 0.1 percent) and Malta (flat). The sharpest decline was in Greece (3.3 percent) ahead of the Netherlands (3.2 percent) and Belgium (2.7 percent). Just Latvia (0.5 percent) reported an increase in prices versus a year ago.

The steeper than anticipated fall in Eurozone producer prices in December will simply reinforce worries about mounting deflation pressures right across the region and add to concerns in some quarters that the ECB may have done too little, too late.

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.