The combined producer and import price index surprisingly rose in January. A 0.7 percent monthly increase was well wide of the market consensus and, following a 0.7 percent drop in December, lifted the annual inflation rate from 3.2 percent to 3.3 percent. This was its first increase in eight months but still some way short of its 6.9 percent high in May/June.

Domestic producer prices matched the 0.7 percent monthly headline gain, raising their yearly rate from 2.6 percent to 2.8 percent. Import prices were up a slightly smaller 0.6 percent, trimming their annual change from 4.4 percent to 4.3 percent.

Within the monthly change in the PPI, energy (7.5 percent) was especially strong and alone added nearly 0.4 percentage points. Elsewhere, computer, electronic and optical products, and watches (1.6 percent) were also robust and gains here were only partially offset by weaker agricultural and forestry products (minus 0.8 percent). The increase in import prices was similarly dominated by energy which added 0.5 percentage points. As a result, the underlying composite index rose 0.3 percent versus December, raising the annual core inflation rate from 1.9 percent to 2.0 percent, its second successive rise.

Pipeline inflation pressures in Swiss industry are at manageable levels but successive increases in the core rate boost the chances of the SNB raising its policy rate again in March. Today's report also puts the Swiss ECDI at 7 and the ECDI-P at minus 13. The divergence shows that while prices are running ahead of market expectations, the real economy in general is slightly underperforming.

Prices are seen slipping a further 0.1 percent on the month.

The producer price and import price index focuses on the actual prices of products on the market (transaction price) at the time of the order. The prices of domestic products are taken at the producer or factory level, excluding value added tax and consumption taxes. For imports, prices are collected at the Swiss border, without the value added tax, taxes on consumption and tariffs. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer

The producer price and import price index 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). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. Producer and import prices are more volatile than consumer prices. While the CPI is the price index with the most impact in setting interest rates, the producer price and import price index provides significant information earlier in the production process. The producer price and import price index 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 producer price and import price index decreases or posts only small increases, but bond prices fall when the index 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.