The April PPIs were mixed but leave a generally soft picture of inflationary pressures.

Factory gate prices were marginally weaker than expected. A second successive 0.2 percent monthly increase was a tick less than the market consensus, albeit still large enough to boost the annual inflation rate from 0.7 percent to 1.1 percent. Alcohol and tobacco (1.2 percent) again saw the steepest monthly advance ahead of food (0.5 percent) and coke and petroleum products (also 0.5 percent). Chemicals and pharmaceuticals (minus 0.5 percent) posted the largest fall. Core prices were only flat, leaving the underlying yearly rate similarly steady at just 0.2 percent.

At the same time, raw material and fuel costs surprised on the upside with a 0.6 percent monthly gain that lifted yearly inflation from minus 2.5 percent to minus 1.6 percent. Most components saw monthly rises, notably crude petroleum, natural gas and metal ores (7.9 percent) but fuel (minus 6.5 percent) was sharply lower.

Today's report is consistent with a gradual improvement in overall manufacturing conditions but the near-term outlook remains sluggish. Following this morning's suite of data, the UK's RPI and RPI-P both stand at 19, showing overall economic activity running slightly ahead of market forecasts.

The downward pressure on producer prices in the UK is expected to ease. The year-over-year decline in input prices is forecast at 1.4 percent in April, smaller than a 2.5 percent drop in March. Output prices are expected to rise 1.1 percent on year, up from a 0.6 percent rise in March.

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.