Producer prices resumed their downswing in mid-quarter. A 0.4 percent monthly drop was a good deal steeper than expected and the fourth fall in the last five months. However, positive base effects ensured that annual PPI inflation still rose and, at minus 4.1 percent, it was up 0.3 percentage points versus January for its strongest reading since last July.

Energy prices dropped a monthly 1.2 percent but even excluding this category prices only edged 0.1 percent firmer. Indeed, at minus 0.8 percent, the annual underlying rate was down from January's minus 0.5 percent. Elsewhere, intermediates were flat on the month while consumer durables and non-durables rose 0.1 percent and capital goods 0.2 percent.

Today's report leaves intact a still very soft trend in underlying pipeline pressures that suggests that manufacturing will not pose any hurdles in the way of CPI inflation falling back to 2 percent. Today's data also put the German RPI at exactly zero and the RPI-P at 13. The unexpected weakness of prices is masking a modest degree of outperformance by the real economy.

After firming 0.2 percent on the month in January, February's PPI is seen edging 0.1 percent lower.

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.