Wed May 20 01:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.2% 0.1% 0.1%
Year over Year -1.4% -1.5% -1.7%

Producer prices rose for a third consecutive month in April. However, a 0.1 percent increase versus March was slightly smaller than expected and, at minus 1.5 percent, annual PPI inflation was still deep into negative territory.

That said, but for a 0.1 percent dip in the cost of energy the headline monthly advance would have been 0.2 percent and, also excluding energy, deflation eased from minus 0.5 percent to minus 0.3 percent. The strongest performing subsector was basics where charges were up 0.3 percent from quarter-end while consumer durables gained 0.2 percent and capital goods 0.1 percent. Consumer non-durables were flat.

Today's update provides further evidence of fading deflation pressures in the German economy. The overall PPI has risen 0.3 percent since January and if the May PMI surveys are anything to go by, continued to increase this month. This will be more than welcome at the ECB but following a disappointingly sluggish first quarter and in what is still a very competitive market, economic growth will probably need to accelerate if recent price hikes are to stick, let alone accelerate.

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.