Producer prices edged 0.1 percent higher on the month in June. However, the unexpected increase, which followed a 1.4 percent drop in May, was still small enough to reduce the annual inflation rate from 1.0 percent to minus 0.3 percent, its first sub-zero print since November 2020.

Energy prices, which dipped 0.2 percent versus May, had a small negative effect but even excluding this category the PPI fell 0.3 percent, trimming its yearly rate from 3.2 percent to 2.8 percent. Rather, the main area of weakness was intermediates where prices dropped 0.9 percent. Elsewhere, both durable and non-durable consumer goods increased just 0.1 percent while capital goods were up 0.2 percent.

The minimal rise in producer prices last month was only the second since last September and leaves intact a clear downward underlying trend. Pipeline inflation pressures continue to ease in German manufacturing which must bode well for lower CPI inflation further down the road. However, prices in services remain much stickier. More generally, the June report puts the German ECDI at minus 5 and the ECDI-P at minus 11, both measures being close enough to zero to indicate overall economic activity performing broadly in line with market expectations.

After May's 1.4 percent monthly fall, June's PPI is seen falling a further 0.4 percent. Year-over-year, the PPI has cooled for eight consecutive months and is seen edging lower from plus 1.0 percent to plus 0.8 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.