Producer prices fell for a fifth straight month in May. A 1.9 percent monthly decline was again steeper than the market consensus and followed a hefty unrevised 3.2 percent drop in April. The latest slide reduced annual PPI inflation from 0.9 percent to minus 1.5 percent, its first sub-zero reading since December 2020.

Almost inevitably, it was the energy market driving the latest fall and prices here were down a further 5.0 percent on the month having already tumbled 10.2 percent in April. Elsewhere, intermediates declined 1.0 percent, their fourth successive decrease, and consumer non-durables dipped 0.1 percent. With capital goods only flat, consumer durables (0.3 percent) posted the only increase. Consequently, core prices fell 0.4 percent for their first back-to-back fall since April/May 2020 and reduced the annual underlying rate from 5.1 percent to 3.4 percent.

Regionally, almost all member states saw sizeable monthly declines in their national PPI, including France (1.4 percent), Germany (1.3 percent), Italy (3.1 percent) and Spain (1.6 percent).

With underlying pipeline pressures in industry continuing to ease, the May data should be well received at the ECB. Still, service sectors prices remain firm and until some cooling is seen here, central bank policy will retain a clear tightening bias. Today's update leaves the Eurozone ECDI and ECDI-P deep in negative surprise territory at minus 46 and minus 53 respectively. However, with core HICP inflation so high, underperforming economic activity is probably seen by the ECB as more of a positive than a negative.

Producer prices are expected to fall 1.3 percent on the year in May which would compare with a 1.0 percent rise in April.

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.