Fri Oct 02 04:00:00 CDT 2015

Consensus Actual Previous Revised
Month over Month -0.6% -0.8% -0.1% -0.2%
Year over Year -2.3% -2.6% -2.1%

Producer prices (ex-construction) followed a slightly larger revised 0.2 percent monthly fall in July with a sharper than expected 0.8 percent decline in August. This was their steepest decrease since January and reduced annual PPI inflation from minus 2.1 percent to minus 2.6 percent.

A second consecutive drop in energy charges (2.6 percent after 0.6 percent in July) again did most of the damage and excluding this category the PPI was down only 0.2 percent on the month. Even so, ominously this was the first fall in the core since February. Compared with August 2014 the core index was off 0.5 percent, a tick steeper than the yearly rate at the start of the quarter. Accordingly, prices were also generally soft elsewhere too. Hence, while consumer goods were up 0.1 percent on the month, capital goods were just flat and intermediates declined fully 0.5 percent.

Most member states saw monthly decreases. Amongst the larger four economies, France was down a full 1 percent, Germany 0.4 percent and Italy 0.7 percent. Spain posted an even sharper 1.7 percent decline and all countries recorded negative annual PPI rates.

Eurozone PPI developments continue to be a major worry for the ECB. Although growth differences between producer and consumer prices can be considerable over short periods of time, the dip in August's core index warns of a deterioration in underlying trends. Attainment of the ECB's price stability goals looks further away than ever.

The producer price index (PPI) is a measure of the average trading price of products and covers manufacturing, mining and quarrying and electricity, gas and water supply. The index is calculated excluding the construction sector.

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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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 taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.