Producer prices rose 0.2 percent on the month in March, just on the firm side of the market consensus and only their second increase since September. Annual PPI inflation climbed from minus 4.1 percent to minus 2.9 percent, matching its highest reading since last June but still sub-zero for a ninth straight month.

Headline prices would have been rather stronger but for energy which was only flat. Excluding this category, the PPI was up a monthly 0.3 percent although even this left the annual underlying rate unchanged at minus 0.8 percent. Elsewhere, intermediates rose 0.1 percent while consumer durables and non-durables increased 1.0 percent and 0.6 percent respectively and capital goods 0.2 percent.

Today's report suggests that deflationary pressures in manufacturing are on the wane. Still, demand remains soft enough to mean that the sector will do little to upset the recent downtrend in CPI inflation. The March data also put the German RPI at 8 and the RPI-P at 4. Both readings are close enough to zero to indicate economic activity in general performing much as expected.

After falling 0.4 percent on the month in February, March's PPI is seen up a marginal 0.1 percent. Year-over-year, the PPI is expected to fall 3.3 percent versus 4.1 percent contraction in February.

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.