Producer prices surprisingly rose in December for the first time since September. Following a marginally steeper revised 1.0 percent monthly drop in November, the PPI increased 1.1 percent. This was nowhere close to the market consensus but with base effects strongly negative, still small enough to reduce the annual inflation rate from 27.0 percent to 24.6 percent, its lowest mark since November 2021.

However, as usual, energy (2.5 percent) was the driving force behind the headline monthly change and excluding this category the PPI actually fell 0.1 percent, its first fall since May 2020. This cut the underlying annual rate by 0.9 percentage points to 12.3 percent, matching its weakest print since last January. Intermediates dropped a further 0.5 percent on the month but there were fresh gains in consumer durables (0.4 percent), non-durables (0.5 percent) and capital goods (0.3 percent).

Regionally, the picture was very mixed with sizeable monthly increases in France (1.4 percent) and Italy (3.8 percent) contrasting with falls in Germany (0.4 percent) and Spain (1.7 percent).

Despite the surprise rise in the overall PPI, the slowdown in core prices should come as a relief to the ECB. Key interest rates are still most likely going up again next month but a sustained deceleration in the underlying PPI would certainly boost the chances that the peak to borrowing costs is not too far away. The Eurozone's ECDI and ECDI now stand at 35 and 31 respectively; both measures indicating that economic activity in general continues to outpace market expectations.

Producer prices are expected to fall 0.7 percent on the month in December for annual growth of 22.6 percent which would compare with November's 27.1 percent.

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 headline index can be very volatile so financial markets look at a core index to better understand underlying trends. This excludes the often highly erratic energy subsector.

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.