Producer prices were much weaker than expected in January. A 2.8 percent monthly fall was one of the steepest on record and slashed the annual inflation rate from 24.5 percent to 15.0 percent, its lowest mark since August 2021.

However, as usual, energy (minus 9.4 percent) dominated the monthly change and excluding this category the PPI actually rose a sizeable 1.1 percent. That said, negative base effects ensured that the underlying annual rate still fell from 12.4 percent to 11.1 percent, historically very high but its weakest print since December 2021. Intermediates rose 0.8 percent on the month, capital goods 1.2 percent, consumer durables 1.6 percent and non-durables 1.5 percent.

Regionally, the picture was again mixed with sizeable monthly declines in Germany (1.2 percent) and Spain (2.0 percent) contrasting with a fresh rise in France (0.8 percent).

Accordingly, despite the surprising weak headline print, the January data will not go down well at the ECB. Underlying pipeline pressures in Eurozone manufacturing remain uncomfortably strong and there is nothing here to dissuade the central bank from hiking another 50 basis points this month. The Eurozone's ECDI and ECDI now stand at minus 24 and minus 43 respectively; both measures indicating that economic activity in general is falling quite well short of market expectations.

Producer prices are expected to ease to an annual 17.7 percent rate in January versus December's 24.6 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.