Thu Aug 20 01:00:00 CDT 2015

Consensus Actual Previous
Month over Month -0.2% 0.0% -0.1%
Year over Year -1.5% -1.3% -1.4%

The July producer price index was better than anticipated. On the month, the PPI was unchanged and down 1.3 percent on the year. The readings were above forecasts of a monthly .2 percent decline and an annual 1.5 percent slide.

The monthly drop was attributable to a monthly 0.3 percent decline and annual 4.1 percent drop in energy. The annual drop in energy followed June's larger drop of 4.4 percent. Capital goods prices actually increased 0.8 percent on the year after increasing 0.7 percent in June. Basics were unchanged on the month but dropped a larger 0.6 percent on the year after sliding 0.4 percent the month before.

The continued decline reinforces the sense that the economic recovery in Germany and in the Eurozone more broadly has not gathered sufficient pace to give German producers the confidence to push up their prices.

The slowdown in the Chinese economy has been a key concern for German producers this year and those fears were heightened last week when China allowed its currency to weaken, which some economists interpreted as a sign China's slowdown is worse than expected.

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.