Producer prices fell for a third time in as many months in December. A 0.4 percent monthly drop was the least steep of the sequence and shallower than the market consensus but enough to see the annual inflation rate slide from 28.2 percent to 21.6 percent, its lowest level since November 2021.

Once again, energy (minus 1.0 percent) played an important role. However, even excluding this category, the annual underlying inflation rate still fell from 12.7 percent to 12.0 percent. Elsewhere, intermediates dropped a monthly 0.4 percent, but there were fresh gains in capital goods (0.3 percent) and both consumer durables (0.9 percent) and non-durables (0.5 percent).

Today's report bodes well for weaker CPI inflation further down the road but core PPI trends suggest getting back to 2 percent will not be easy. More generally, the December data put the German ECDI at 14 and the ECDI-P at 9, both measures remain above zero but only signal a moderate degree of overall economic outperformance versus market expectations.

Producer prices are expected to fall 1.1 percent on the month in December with the year-over-year increase falling more than 7 percentage points to 20.8 percent.

The Producer Price Index (PPI) measures the price of industrial and commercial goods produced and sold domestically (excluding turnover tax). About 1,250 types of goods are used to calculate the index and prices are reported by a total of 5,000 enterprises under fixed contractual conditions. 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 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.