Germany's producer price index showed further but less pronounced deflation in May. The index was flat on the month after a previous increase of 0.2 percent and fell 2.2 percent on the year after a previous decline of 3.3 percent. Producer prices have been falling on the year since mid-2023 but the decline reported today is the smallest over that period.

Energy prices were again the main factor driving headline producer price deflation, falling 6.4 percent on the year in May. Excluding energy prices, the index rose 0.3 percent on the month in May, as it did in April, and was flat on the year after a previous fall of 0.6 percent.

Today's data were slightly weaker than the consensus forecast for a year-over-year decline of 2.1 percent in the index. The RPI measure rose from minus 9 to minus 7 while the RPI-P measure fell from minus 10 to minus 12, indicating that German data are coming in close to but a little below consensus expectations.

After rising 0.2 percent on the month in April, May's PPI is seen slipping 0.1 percent. Year-over-year, the PPI is expected to contract 2.1 percent versus April's contraction of 3.3 percent.

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.