Producer prices fell again in December. A 0.8 percent monthly drop was steeper than the market consensus and the sharpest since last May. Annual inflation decelerated from minus 8.8 percent to minus 10.6 percent, a 3-month low.

The monthly headline slide was largely due to energy where prices were down fully 2.3 percent. Still, even excluding this category, a 0.3 percent decline in intermediates was enough to ensure 0.1 percent dip in the core index. This left the yearly underlying rate unchanged at a lowly minus 0.4 percent. Elsewhere, capital goods and consumer durables were both flat while consumer non-durables edged just 0.1 percent higher.

Regionally, the national PPI fell on the month in most member states including Germany and Italy (both 1.2 percent) and Spain (0.2 percent). However, France (0.1 percent) posted a second successive rise.

The December data show sustained weakness in underlying pipeline price pressures in the Eurozone which means that manufacturing is not a problem for an ECB firmly focused on meeting its 2 percent HICP inflation target. The region's RPI now stands at minus 3 and the RPI-P at 6. Economic activity is general is performing much as expected.

Producer prices are expected to fall 0.5 percent on the month and 10.2 percent on the year, following an 8.8 percent yearly drop in November.

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.