Wed Nov 04 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.5% -0.3% -0.8%
Year over Year -3.3% -3.1% -2.6%

Producer prices (ex-construction) were again very weak in September. A 0.3 percent monthly fall was actually slightly less than expected but still the third in a row and enough to steepen the PPI's annual rate of decline from an unrevised 2.6 percent to 3.3 percent, its weakest performance since January.

Inevitably the main downward pressure on the monthly change came from energy and charges here were off 0.8 percent after a 2.6 percent slump in August. However, even without this category the PPI declined 0.2 percent and, at minus 0.6 percent, its yearly change was a tick weaker than last time. Accordingly, prices elsewhere were generally soft too and there were monthly falls in intermediates (0.5 percent) and consumer durables (0.1 percent). Capital goods were flat and consumer non-durables up just 0.1 percent.

Apart from Belgium (0.5 percent), France (0.1 percent) and Malta (0.5 percent) national PPIs fell on the month across the board. Amongst the other larger members Germany saw a 0.4 percent decrease and Italy a 0.2 percent drop while Spain, having already nosedived 1.7 percent in mid-quarter, was down a further 0.9 percent.

ECB members looking for signs that QE is helping to restore some upside pressure on final product prices will find nothing to cheer about in this report. Bar the odd wobble, overall Eurozone producer prices have been falling for two and a half years now. Speculation about a fresh policy ease in December will continue to bubble away.

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.