Producer prices fell for a sixth straight month in June. A 0.4 percent monthly decline was the smallest of the sequence but still a little steeper than the market consensus and sharp enough to cut annual PPI inflation from minus 1.6 percent to minus 3.4 percent, its weakest mark since June 2020.

For once, it was not energy (minus 0.5 percent) driving the monthly fall but intermediates (minus 0.7 percent) which posted a fifth consecutive drop. Elsewhere, capital goods edged 0.1 percent firmer while both consumer durables and non-durables were only flat. Consequently, core prices decreased a further 0.3 percent, their third consecutive drop, to reduce the annual underlying rate from 3.3 percent to 2.5 percent, the lowest reading since March 2021.

Regionally, most member states saw monthly gains. Amongst the larger four economies, France was down 1.1 percent, Germany 0.3 percent and Italy 0.4 percent. However, Spain rose 0.7 percent, its first increase in four months.

With underlying pipeline pressures in industry continuing to ease, the June data bode well for lower HICP inflation to come. Still, with price rises in services still unacceptably strong, today's update will not deter the ECB from operating with a tightening bias. The Eurozone ECDI (11) and ECDI-P (4) are both above zero but close enough to zero to indicate overall economic activity performing much as expected.

Producer prices are expected to fall 3.2 percent on the year in June. The monthly reading, at minus 1.9 percent in June, has been in contraction for five straight months.

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.