Fri Nov 20 01:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.2% -0.4% -0.4%
Year over Year -2.0% -2.3% -2.1%

Producer prices fell again in October. A second successive 0.4 percent monthly drop was the fourth decline since May, steeper than expected and sharp enough to increase the annual rate of deflation from 2.1 percent to 2.3 percent. Prices are now some 4.3 percent below their peak in January 2013.

A 0.9 percent monthly slide in energy charges did much of the damage but intermediates were also off 0.6 percent and consumer goods 0.1 percent. Capital goods were also only unchanged and, excluding energy, the PPI was down 0.3 percent versus September for an annual rate of minus 0.7 percent, a tick more negative than last time.

On an overall basis producer prices have been trending gradually lower for the best part of three years now. The core has been rather more resilient but today's results still underline an absence of upside pressure from German industry on CPI inflation. To this end there is nothing really new here.

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.