The December PPIs were again soft and much weaker than expected.

Factory gate prices dropped fully 0.6 percent on the month, well short of the market consensus and matching their steepest decline since December 2022. Even so, base effects saw annual inflation edge up from minus 0.1 percent to 0.1 percent, a 3-month high. Amongst the components, the sharpest monthly fall was in coke and petroleum products (8.2 percent) ahead of chemicals (0.7 percent). On the upside, the only increase of any real size was in alcohol and tobacco (0.7 percent). Consequently, the core index was again only flat, reducing the annual underlying rate from 0.2 percent to just 0.1 percent.

At the same time, raw material and fuel costs fell a monthly 1.2 percent, double expectations and trimming their yearly rate by a tick to minus 2.8 percent, a 5-month low. Crude petroleum, natural gas and metal ores (minus 12.4 percent) posted the sharpest monthly drop ahead of fuel (2.5 percent). The only increase of note was in imported food (2.7 percent).

The December data are a good deal weaker than expected and underscore the absence of any significant inflation pressures in UK manufacturing. They also put the UK's RPI at 19 and the RPI-P at 17. Both measures show overall economic activity still running somewhat ahead of market expectations.

Output prices are seen falling a further 0.2 percent on the month while input costs are expected to drop a steeper 0.6 percent.

The Producer Price Index (PPI) measures the prices of goods bought and sold by manufacturers. The input price index measure the prices of materials and fuels purchased by manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running. The output price index captures prices charged by manufacturers as they pass through the factory gate and excludes any VAT or similar deductible tax. Both measures may be seen as leading indicators of consumer price index (CPI) inflation although the short-term correlation is only very weak.

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). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. A producer's price is the amount received by a producer from the purchaser of a unit of goods or services produced as output less any value added tax (VAT) or similar deductible tax, invoiced to the purchaser. It excludes any transportation charges invoiced separately by the producer.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. The output price indexes measure change in manufacturer' goods prices produced and often are referred to as factory gate prices. Input prices are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day operations.

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.

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.