Producer prices fell for a fourth time in as many months in January. A 1.0 percent monthly drop was shallower than the market consensus but still steep enough to reduce the annual inflation rate slide from 21.6 percent to 17.8 percent, its lowest level since September 2021.

Once again, energy (minus 5.0 percent) dominated the overall monthly change. Indeed, excluding this category, prices rose fully 1.4 percent although strongly negative base effects still cut the annual underlying inflation rate from 12.0 percent to 10.7 percent. Elsewhere, intermediates were up a monthly 1.0 percent, capital goods 1.7 percent, consumer durables 1.9 percent and non-durables 1.8 percent.

Despite the headline PPI decline, today's report warns that underlying pipeline pressures in manufacturing industry are easing only slowly. This will be seen by the ECB's hawks as further proof of the need for higher interest rates next month. More generally, the January update puts the German ECDI at 12 and the ECDI-P at 15, both measures above zero but only signalling a modest degree of overall economic outperformance versus market expectations.

Prices are seen down 1.6 percent on the month.

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.