The February PPIs were mixed but overall; on the firm side of market expectations.

Factory gate prices were stronger than forecast in February. A 0.3 percent increase on the month was 0.2 percentage points above the market consensus and followed an upwardly revised flat performance in January. Annual inflation climbed from minus 0.3 percent to 0.4 percent. Six of the 10 product groups provided a boost to the yearly rate with coke and petroleum products, where prices climbed a monthly 2.7 percent, leading the way. Core prices were up 0.2 percent versus the start of the year, lifting the underlying yearly rate from minus 0.3 percent to 0.3 percent, a 5-month high.

At the same time, raw material and fuel costs surprisingly declined although a 0.4 percent monthly drop only followed a significantly shallower revised 0.1 percent dip in January. Most components saw monthly falls, notably fuel (5.2 percent) and domestic food (0.8 percent). The only increase of any note was in crude petroleum and natural gas and metal ores (1.1 percent).

Today's report provides some additional evidence that the worst of the downswing in manufacturing activity may be over. Even so, for now pipeline inflation pressures remain subdued and of no concern for the BoE. The UK's RPI now stands at minus 18 and the RPI-P at minus 9, both measures showing overall economic activity falling slightly behind market forecasts.

Output prices are expected to rise 0.1 percent on the month and input costs a marginally stronger 0.2 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.