January 5, 2017 04:00 CST

Consensus Actual Previous
Month over Month 0.2% 0.3% 0.8%
Year over Year -0.1% 0.1% -0.4%

Excluding construction, producer prices rose for a third straight month in November. A stronger than expected 0.3 percent monthly increase in the PPI saw the annual inflation rate climb from minus 0.4 percent to 0.1 percent, its first positive reading since June 2013.

Moreover, the increase in overall prices was almost matched by the core index. Hence, without energy, where prices rose 0.7 percent, the PPI was up a monthly 0.2 percent to boost the yearly underlying rate from 0.0 percent to 0.4 percent. Elsewhere amongst the major subsectors, intermediates climbed up fully 0.5 percent versus October and non-durable consumer goods advanced 0.1 percent but capital goods were only flat and durable consumer goods dipped 0.1 percent.

Regionally, most Eurozone states saw monthly rises in their national PPIs, the main exceptions being Greece (minus 0.7 percent) and Portugal (minus 0.3 percent). Belgium, and Ireland (both 1.4 percent) as well as Estonia (1.2 percent) saw the strongest gains. The larger countries were mixed with moderate increases in Germany (0.3 percent) and Spain (0.2 percent) but a sizeable rise in France (0.8 percent) and hefty fall in Italy (0.7 percent).

Overall the November PPI data provide some further hope that underlying Eurozone inflation may finally be starting to move in the right direction. However, it is early days yet and with product markets still very tight across much of the region it remains to be seen whether even this modest pick-up can be passed on at the consumer level.

The Producer Prices Index (PPI) measures the gross trading price of industrial goods sold into the domestic market. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer and, in contrast to the consumer price index (CPI), excludes VAT and other deductible taxed associated with turnover. The PPI covers manufacturing, mining and quarrying and utilities but excludes construction.

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.