The January PPIs were again soft and, overall, on the weak side of market expectations.

Factory gate prices dropped a further 0.2 percent on the month, in line with the market consensus but following a slightly smaller revised 0.5 percent drop in December. Annual inflation eased to minus 0.6 percent, down from 0.1 percent and matching its weakest outturn since October 2020. Food subtracted 0.3 percentage points from the yearly change but all the subsectors had a negative impact bar chemicals and pharmaceuticals (0.1 percentage point). Consequently, core prices were up 0.2 percent versus December, trimming the underlying yearly rate from 0.0 percent to minus 0.4 percent, its lowest mark since December 2009.

At the same time, raw material and fuel costs fell a surprisingly steep 0.8 percent on the month, largely on the back of a 6.2 percent slump in the price of fuel. This reduced their annual rate from minus 2.1 percent to minus 3.3 percent.

Today's unexpectedly weak inflation updates should be only cautiously well received at the BoE and, absent a downside shock in the February CPI report, there may be again only one vote on the MPC to lower Bank Rate next month. With the core rate still sticky and well above target, the majority of MPC members are unlikely to favour a cut as soon as March. The UK's RPI now stands at minus 6 and the RPI-P at 5, both measures essentially showing overall economic activity matching market forecasts and the gap between the two reflecting the surprising softness of recent inflation news.

Factory gate prices are expected to fall 0.2 percent on the month following a 0.6 percent slide in December. Input costs are forecast flat after a 1.2 percent drop.

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.