Producer prices were surprisingly soft in November. A 0.3 percent monthly drop was 0.2 percentage points steeper than the market consensus and the first fall since July but, following a marginally larger revised 0.3 percent increase in October, the annual inflation rate still climbed from minus 9.4 percent to minus 8.8 percent.

On the month, there were broad-based declines amongst the main components with consumer non-durables (0.0 percent) the only exception. Energy was down 0.8 percent, intermediates 0.5 percent and both capital goods and consumer durables 0.1 percent. Excluding energy, prices fell 0.2 percent for a fourth straight month, reducing the annual core inflation rate from minus 0.2 percent to minus 0.5 percent.

Regionally, the national PPI fell on the month in Germany (0.5 percent), Italy (1.2 percent) and Spain (2.1 percent) but rose in France (2.4 percent).

The latest slide in core prices underscores a clear downward trend in underlying pipeline pressures in Eurozone manufacturing. The sector remains firmly on track to help the ECB meet its 2 percent HICP target sooner than expected just a few months ago. That said, with the Eurozone RPI now at 23 and the RPI-P at 50, pressure for an early rate cut is not as high as it once was.

Producer prices are expected to fall 8.6 percent on the year in November which would compare with percent 9.4 contraction in October. For the monthly figure, the consensus calls for minus 0.1 percent for November after a 0.2 rise in October.

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.