Producer prices were a little firmer than expected in July. Even so, a 0.5 percent monthly decline was the seventh fall in a row and steep enough to reduce the annual inflation rate from June's minus 3.4 percent to minus 7.6 percent, a new record low.

The monthly headline drop was again led by intermediates where prices were down fully 1.2 percent. Energy also saw a significant 0.9 percent decrease but elsewhere, consumer durables and non-durables rose 0.2 percent and 0.1 percent respectively and capital goods also increased 0.2 percent. As a result, the core PPI was 0.4 percent weaker on the month, matching its downwardly revised June outcome and trimming the yearly underlying rate from 2.5 percent to 1.6 percent. This was the lowest annual core rate since March 2021 and more than 14 percentage points short of the May 2022 peak.

Regionally, both France (minus 0.2 percent) and Germany (minus 1.0 percent) posted monthly falls while Italy (0.0 percent) was flat and Spain (0.1 percent) marginally higher. Ireland (minus 8.1 percent), where the data have been especially volatile in recent months, recorded a substantial decline.

The July update reinforces an increasingly disinflationary picture of Eurozone manufacturing. However, many on the ECB Governing Council will want to see this mirrored in services before pulling the plug on interest rate hikes. Next week's policy meeting remains a close call. The Eurozone ECDI (minus 20) and ECDI-P (minus 39) remain quite deep in negative surprise territory and so indicative of overall economic activity underperforming market expectations by some distance.

Producer prices are expected to fall 7.8 percent on the year in July which would compare 3.4 percent contraction in June. The monthly showing, at an expected minus 0.7 percent, has been in contraction for six 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.