Fri Mar 20 02:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.2% 0.1% -0.6%
Year over Year -2.0% -2.1% -2.2%

February producer prices saw their first increase in more than a year, albeit only a minimal one. Headline prices were up just 0.1 percent on the month after hefty back-to-back falls in December and January to nudge annual PPI inflation a tick higher to minus 2.1 percent. The outturns were marginally softer than expected.

For once, energy had a positive impact although even a 0.7 percent monthly rise here still left charges some 5.5 percent lower than in February 2014. Excluding this category the PPI was unchanged from its January level and down 0.6 percent on the year, also matching the previous period's annual rate. Elsewhere, basics dropped a monthly 0.3 percent and capital goods were only flat but consumer durables (0.1 percent) and non-durables (0.3 percent) both recorded small gains.

The bounce in overall prices last month will be welcomed by the Bundesbank and ECB alike but the ongoing weakness of underlying prices remains a big worry. Volatility in the oil market could well make for relatively sharp swings in the PPI over coming months but without a sustained increase in the core index, the ECB's chances of meeting its medium term price stability goals will be as distant as ever.

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.