Mon Dec 21 01:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.2% -0.2% -0.4%
Year over Year -2.4% -2.5% -2.3%

Producer prices behaved much as expected in November. A 0.2 percent monthly decline followed an unrevised 0.4 percent fall in October and constituted the fifth decrease in the last six months. Annual PPI deflation rose to 2.5 percent from 2.3 percent last time.

Energy prices, which fell 0.2 percent versus October, had no significant impact on the headline index and excluding this subsector prices were still 0.2 percent weaker on the month. On an annual basis the core PPI dropped 0.7 percent, matching its rate last time.

Elsewhere, intermediates were off 0.5 percent from the start of the quarter while consumer goods dipped 0.1 percent and capital goods edged 0.1 percent higher.

The latest declines in headline and underlying producer prices suggest that a significant acceleration in German CPI inflation is unlikely any time soon, despite some signs of increasing capacity constraints in some areas.

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.