Producer prices continued to slide at the start of the year and by much more than expected. A 0.9 percent monthly drop was nowhere near the market consensus and matched the steepest since May 2023. The December decrease is also now put at 0.9 percent but with base effects strongly positive, annual PPI inflation still picked up from minus 10.7 percent to minus 8.6 percent.

The monthly headline slide was very largely due to energy where prices were down fully 2.9 percent. Excluding this category, the PPI edged up a couple of ticks making for the first increase in the core index since March 2023. Even so, the yearly underlying rate still fell from minus 0.5 percent to a lowly minus 1.5 percent. Elsewhere, intermediates and consumer durables decreased 0.2 percent versus December while consumer non-durables increased 0.3 percent and capital goods 0.6 percent.

January's mixed report still leaves very subdued underlying pipeline inflation pressures in the region as a whole. In terms of meeting its 2 percent HICP inflation target, manufacturing is not a problem for the ECB. The Eurozone RPI now stands at 8 and the RPI-P at 4. Economic activity in general is just about beating market expectations.

Producer prices have shown sustained weakness and are expected to dip a further 0.1 percent on the month in January, putting the annual inflation rate at minus 8.1 percent after minus 10.6 percent in December.

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.