Tue Oct 20 01:00:00 CDT 2015

Consensus Actual Previous
Month over Month -0.2% -0.4% -0.5%
Year over Year -1.8% -2.1% -1.7%

Producer prices were weaker than expected in September. A 0.4 percent monthly drop was the third decline since May and large enough to steepen the annual rate of deflation from 1.7 percent in August to 2.1 percent, the most marked since January.

Energy fell a further 1.1 percent from mid-quarter on the back of a 4.0 percent slide in petroleum products and now stands 6.1 percent below its level a year ago. Intermediates were also off 0.4 percent. However, capital goods were unchanged and consumer goods were up 0.3 percent. Even so, excluding energy the PPI dipped 0.1 percent on the month for a yearly rate of minus 0.6 percent after a 0.5 percent annual decline last time.

PPI developments continue to suggest a soft near-term outlook for consumer prices. In particular, another, albeit only minor, drop in the core index is of increasing concern amidst signs that economic growth is falling somewhat short of earlier expectations. Speculation about additional ECB QE, possibly even as soon as Thursday, will probably get a small boost from today's report.

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.