Producer prices were much weaker than expected in March. A 2.6 percent monthly fall was nowhere near the market consensus and the steepest since a 3.9 percent slump last November. The PPI has now declined for six consecutive months with the latest drop slashing the annual inflation rate from 15.8 percent to 7.5 percent, its lowest mark since May 2021.

As usual, it was energy that did much of the work and prices here were down fully 7.6 percent versus February. Elsewhere, intermediates dipped 0.1 percent but there were fresh gains in capital goods (0.2 percent), consumer durables (0.3 percent) and non-durables (0.7 percent). As a result, the core PPI rose 0.2 percent although with base effects strongly negative, this was small enough to reduce the yearly underlying rate from 10.2 percent to 7.9 percent.

Today's update again provides a misleadingly soft impression of underlying pipeline pressures on prices. The modest monthly increase in the core rate at least bodes well for lower CPI inflation further down the road but for now, the German participants on the ECB's Governing Council will still want another hike in interest rates next month. More generally, the March report puts the German ECDI at 9 and the ECDI-P at 23, both measures signalling a modest degree of overall economic outperformance versus market expectations.

March's monthly rate is seen down 0.2 percent with the year-over-year rate at plus 10.0 percent, the latter would compare with February's 15.8 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.