Wed Apr 20 01:00:00 CDT 2016

Consensus Actual Previous
Month over Month 0.1% 0.0% -0.5%
Year over Year -2.8% -3.1% -3.0%

Producer prices in March avoided falling for the first time since last July. Even so, an unchanged level versus February was still weaker than expected and soft enough to push the annual rate of PPI deflation a couple of ticks higher at 3.1 percent. Prices have not registered positive monthly growth since April 2015.

Within the PPI basket, a 0.2 percent monthly rise in energy essentially offset a 0.2 percent drop in consumer goods while intermediates and capital goods recorded no change. Excluding energy, the PPI was 0.1 percent lower than in mid-quarter and 0.9 percent short of its level a year ago after a 0.7 percent annual decline last time.

The stability of producer prices last month may mean that deflationary pressures in the manufacturing sector are finally starting to ease. That said, with the core PPI down again, there is little sign of any real move in the underlying trend. In the absence of a sustained positive shock from the commodity markets, German CPI inflation in 2016 looks likely to remain dangerously close to zero.

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.