The combined producer and import price index fell 0.3 percent on the month in May, its first decline since February. The unexpected drop reduced the annual inflation rate from 1.0 percent to minus 0.3 percent, its first negative print since March 2021.

Domestic producer prices were up 0.4 percent versus April, lifting their yearly rate from 1.9 percent to 2.0 percent. Consequently, it was import prices that drove the headline index lower. These decreased 1.8 percent, slashing their annual change from minus 0.9 percent to minus 4.6 percent, the lowest outturn since December 2020.

Within the monthly change in the PPI, petroleum products fell 10.6 percent and alone subtracted more than 0.1 percentage point. However, a 14.0 percent jump in electricity and gas prices added nearly 0.6 percentage points and most other categories posted small gains. Import prices were dragged down by an 11.5 percent slump in petrol prices. As a result, the underlying composite index dipped 0.1 percent on the month, trimming the annual core inflation rate from 2.3 percent to 1.8 percent, matching its weakest reading since July 2021.

Today's update should be well received at the SNB. Although unlikely to prevent another 25 basis point hike in the policy rate next week, diminishing pipeline inflation pressures should mean that the top of the interest rate cycle is not far off. More generally, today's report puts the Swiss ECDI at minus 18 and the ECDI-P at minus 21, extending the period of underperformance that began back in late March.

Prices are expected to edge up 0.1 percent on the month after a 0.2 percent rise in April.

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.