Having fallen in the previous three months, producer prices rose in January. A 0.2 percent monthly increase was just short of the market consensus but followed a much shallower revised 0.8 percent drop in December. Annual PPI inflation was minus 4.4 percent, up from a much stronger revised minus 5.1 percent last time and a 6-month high. Note that today's data incorporate a change in the base year from 2015 to 2021.

Energy prices dipped a monthly 0.1 percent and excluding this category prices rose a slightly larger 0.3 percent. However, at minus 0.5 percent, the annual underlying rate was still well below zero. Elsewhere, consumer non-durables rose 0.1 percent, intermediates 0.2 percent, consumer durables 0.3 percent and capital goods a solid 0.7 percent.

Today's update is probably of most note for the effects of the rebasing. The switch in year means that annual PPI inflation in 2023 was boosted from previously minus 2.4 percent to 0.2 percent with the December rate lifted from minus 8.6 percent to minus 5.1 percent. Even so, the trend in prices remains soft and with output and demand still declining, looks likely to remain so for some time yet. That said, today's report boosts the German RPI to 1 and the RPI-P to 12 meaning that, outside of inflation, overall economic activity is running just a little ahead of market expectations.

After falling a sharper-than-expected 1.2 percent on the month in December, January's PPI is seen rising 0.3 percent. Year-over-year, the PPI is expected to contract 6.6 percent versus 8.6 percent contraction in December.

The Producer Price Index (PPI) measures the price of industrial and commercial goods produced and sold domestically (excluding turnover tax). About 1,250 types of goods are used to calculate the index and prices are reported by a total of 5,000 enterprises under fixed contractual conditions. 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 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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction. These price statistics cover both the sales of industrial products to domestic buyers at different stages in the economic process and the sales between industrial enterprises.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. 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 they 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.