February 2, 2017 04:00 CST

Consensus Actual Previous
Month over Month 0.4% 0.7% 0.3%
Year over Year 1.3% 1.6% 0.1%

Producer prices (ex-construction) rose for a fourth consecutive month in December. A 0.7 percent increase versus November was significantly sharper than expected and equalled the second largest of the year. With base effects also very supportive, annual PPI inflation climbed from 0.1 percent to 1.6 percent, its highest reading in four years.

As usual, energy dominated the headline monthly change and charges here were up some 2.1 percent, adding to a 3.3 percent cumulative spike in September-November. However, even excluding this category the PPI was up 0.3 percent, its fourth straight increase and matching its strongest gain since February 2012. Non-durable consumer goods and intermediates rose 0.4 percent and capital goods 0.1 percent. Only consumer durables (0.0 percent) failed to make any headway.

Regionally by far the majority of Eurozone states saw their national PPI advance versus November. Amongst the larger states, France (0.7 percent) and Spain (1.5 percent) were notably robust and Italy (0.6 percent) was not far behind. The rise in Germany (0.3 percent) was less marked but was the third in a row.

Annual PPI inflation last month will also have been biased up by an energy-driven 1.1 percent monthly slump in January 2016. This means that, as seen in the flash HICP data released on Tuesday, the core results will again be all the more important in judging underlying pipeline price pressures. The recent rising trend here will certainly not have displeased the ECB.

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.