Producer prices surprisingly rose in April. A 0.3 percent monthly increase was much stronger than the market consensus and the first advance since last September. Even so, following a shallower revised 1.4 percent decline in March, the gain still saw annual PPI inflation fall from 6.7 percent to 4.1 percent.

As usual, energy prices were the most volatile, climbing fully 1.0 percent versus March. Without this category, the PPI was up only 0.1 percent on the month, reducing its underlying yearly rate by fully 3.1 percentage points to 4.8 percent. Elsewhere, intermediates dropped a further 0.4 percent on the month but there were fresh gains in capital goods (0.6 percent), consumer durables (0.2 percent) and non-durables (0.4 percent).

Another modest monthly increase in the core PPI at least bodes well for lower CPI inflation further down the road but at nearly 5.0 percent, the yearly rate remains uncomfortably high. The German participants on the ECB's Governing Council will still want another hike in interest rates next month. More generally, the April report puts the German ECDI at 6 and the ECDI-P at minus 2, both measures indicating that overall economic activity is moving broadly in line with market expectations.

April's PPI is expected to fall a monthly 0.5 percent versus March's 2.6 percent decrease.

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.