Producer prices were again weaker than expected in February. A 0.5 percent monthly fall was a couple of ticks steeper than the market consensus and, with base effects quite strongly negative, sharp enough to reduce the annual inflation rate from 15.1 percent to 13.2 percent, its lowest mark since July 2021.

However, as usual, energy (minus 1.6 percent) dominated the monthly change and excluding this category the PPI continued to rise, albeit this time by a relatively modest 0.2 percent. Even so, the underlying annual rate still fell from 11.1 percent to 10.2 percent, historically very high but matching its weakest print since November 2021. Intermediates dipped 0.1 percent on the month but capital goods increased 0.3 percent, consumer durables 0.4 percent and non-durables 0.6 percent.

Regionally, the picture remained very mixed with monthly declines in France (0.9 percent), Germany (0.3 percent) and Italy (1.3 percent) contrasting with a jump in Spain (2.2 percent).

Accordingly, while underlying pipeline pressures in Eurozone manufacturing seem to be easing, they remain uncomfortably strong and, in themselves, offer little reason for the ECB to leave key interest rates on hold next month. The Eurozone's ECDI and ECDI-P now stand at 6 and 21 respectively; both measures indicating that economic activity in general is running slightly hotter than market expectations.

Producer prices are expected to fall 0.3 percent on the month in February for annual growth of 13.5 percent that would compare with January's 15.0 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.