Producer prices were just marginally firmer than expected in August. A 0.6 percent monthly rise was the first increase since last December but, with base effects strongly negative, still small enough to slash the annual inflation rate from July's minus 7.6 percent to minus 11.5 percent, another new record low.

As it is, the monthly headline gain was dominated by energy where prices jumped fully 2.5 percent. Excluding this category, the PPI fell again, down 0.2 percent to trim the yearly underlying rate from 1.6 percent to 1.0 percent. This was the lowest annual core rate since January 2021 and some 15 percentage points short of its May 2022 peak. Prices of intermediates fell a monthly 0.4 percent and consumer durables 0.1 percent. Consumer non-durables and capital goods were flat.

Regionally, France (0.6 percent), Germany (0.3 percent), Italy (0.7 percent) and Spain (1.2 percent) all posted monthly gains as did most of the smaller states.

Despite a relatively robust headline print, another fall in core prices shows that underlying inflation is still trending down, in line with a clearly very weak Eurozone manufacturing sector. The region's RPI and RPI-P now stand at minus 9 and 3 respectively, indicating that overall economic activity is performing much as expected.

Producer prices are expected to fall 11.7 percent on the year in August which would compare with 7.6 percent contraction in July. The monthly showing has been in contraction for seven straight months but is expected to rise 0.5 percent in August.

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.