UK inflation data showed stronger producer price inflation in May. Output prices fell 0.1 percent on the month in May after increasing 0.2 percent in April, with the year-over-year increase picking up from 1.1 percent to 1.7 percent. Input prices were flat on the month after a previous increase of 0.6 percent and fell 0.1 percent on the year after a previous decline of 1.6 percent.

The increase in output price inflation was broad-based, with prices for refined petroleum products increasing 16.2 percent on the year in May after advancing 12.8 percent in April, and the year-over-year increase in manufactured products prices picking up from 1.1 percent to 1.7 percent. A bigger increase in crude petroleum prices made the largest contribution to the smaller year-over-year decline in input prices.

Following today's inflation data, the UK's RPI measure fell from minus 6 to minus 23, while the RPI-P measure fell from minus 7 to minus 23, indicating that recent UK data are now coming in below consensus expectations.

In the UK producer price data for May, factory gate prices are forecast to rise just 0.1 percent on the month after rising 0.2 percent in April while the annual rate is seen accelerating further to 1.7 percent from 1.1 percent. Raw material and fuel costs are expected to post a 0.2 percent drop on the month after a higher-than-expected 0.6 percent gain in April but their year-over-year decline is seen shrinking to minus 0.2 percent from minus 1.6 percent.

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.