Producer prices behaved as expected in October. A 0.2 percent monthly rise matched the market consensus and, with base effects strongly negative, was large enough to boost the annual inflation rate from minus 12.4 percent to minus 9.4 percent.

The overall PPI has now advanced for three consecutive months but only due to rising energy costs which were up 1.0 percent versus September. Excluding this category, prices fell a further 0.2 percent, extending their unbroken trend decline that began in April and reducing their yearly change to minus 0.2 percent, the first sub-zero print since October 2020. Elsewhere, consumer durables edged up a monthly 0.1 percent, but capital goods were only flat, consumer non-durables down 0.1 percent and intermediates 0.3 percent weaker.

Regionally, the national PPI fell on the month in Germany (1.3 percent) and Spain (1.6 percent), was flat in France and rose in Italy (2.2 percent).

Despite the latest headline advance, the ongoing slide in core prices shows that underlying pipeline pressures in Eurozone manufacturing are still easing. This will not translate into a cut in ECB interest rates next week but it will bolster speculation about monetary easing in 2024. To this end, although the region's RPI now stands at minus 7, underperformance is only due to surprisingly weak prices; the RPI-P remains above zero at 10.

Producer prices are expected to fall 9.4 percent on the year in October which would compare with record 12.4 percent contraction in September.

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.