Producer prices fell for a fourth straight month in February. Following an unrevised 0.9 percent drop in January, the PPI declined a further 1.0 percent on the month, double the market consensus and the steepest decrease in the sequence. Annual inflation was pared from minus 8.0 percent to minus 8.3 percent.

In line with January, February's monthly slide was largely due to energy where prices were down a further 3.5 percent. Still, even excluding this category, the PPI only edged up 0.1 percent, trimming the yearly underlying rate from minus 1.3 percent to minus 1.5 percent. Elsewhere, intermediates were flat but there were gains in capital and non-durable consumer goods (both 0.2 percent) and consumer durables (0.3 percent).

The February report provides further evidence that deflationary pressures in Eurozone manufacturing are beginning to ebb core prices recorded their first back-to-back increase since February/March last year. Even so, the broader picture remains soft and the sector poses few problems for the ECB in its quest to get HICP inflation back on target. The region's RPI now stands at 1 and the RPI-P at 24. Economic activity in general is essentially meeting market expectations but this masks moderate outperformance by the real economy.

Producer prices have shown sustained weakness and are expected to fall 8.4 percent on the year in February which would compare with 8.6 percent contraction in January. The monthly showing, at a consensus decline of 0.5 percent in February, fell 0.9 percent in both January and 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.