Producer prices fell again in October. A 0.1 percent dip on the month matched the market consensus and was the fifth decline in the last six months. However, positive base effects still saw annual PPI inflation rise from September's record low of minus 14.7 percent to minus 11.0 percent.

Energy prices matched the monthly headline fall and excluding this category prices dropped 0.2 percent, reducing the yearly core rate from 0.8 percent to just 0.2 percent. Elsewhere, intermediates also fell 0.2 percent as did consumer goods despite a 0.2 percent increase in durables while capital goods edged just 0.1 percent higher.

Today's update leaves intact a solid downtrend in producer prices and offers further proof of the underlying weakness of the German manufacturing sector. However, it also puts both the German RPI and the RPI-P at minus 1, showing that overall economic activity is running very close to market expectations.

After September's percent 0.2 monthly dip, October's PPI is seen slipping 0.1 percent. Year-over-year, the PPI is expected to contract 11.0 percent versus 14.7 percent contraction in September.

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.