Mon Sep 21 01:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.0% -0.5% 0.0%
Year over Year -1.3% -1.7% -1.3%

Producer prices were surprisingly soft in August. A 0.5 percent monthly drop was the steepest since January and, following no revision to the July index, lowered annual PPI inflation from minus 1.3 percent to minus 1.7 percent.

Headline prices were undermined by a 1.2 percent monthly decline in energy costs which now stand 5.0 percent weaker on the year, down from an annual minus 4.1 percent rate last time. However, even excluding this category, the PPI was off 0.2 percent versus July and 0.5 percent short of its level in August 2014. Consumer goods decreased 0.1 percent on the month while intermediates dropped 0.4 percent and capital goods stabilised.

August's fall in the PPI was only the second since the start of the year but sharp enough to leave overall prices at their lowest level since February 2011. Annual PPI inflation has not been above zero since June 2013. Accordingly, while deflation risks across the economy in general have eased in recent months, they have not disappeared altogether. Pressure on the ECB for additional QE continues to build gradually.

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.