The combined producer and import price index surprisingly fell in May for the first time since January. A 0.3 percent monthly drop was well wide of the market consensus but only steep enough to leave the annual inflation rate unchanged at minus 1.8 percent, matching a 5-month high.

Domestic prices decreased 0.5 percent versus April lowering their yearly rate from minus 0.4 percent to minus 1.3 percent. Import prices were flat, lifting their annual rate from minus 4.6 percent to minus 2.9 percent.

Within the PPI, petroleum products (minus 7.5 percent) saw the steepest monthly decline and subtracted almost 0.1 percentage point from the overall change. However, it was chemical and pharmaceutical products (minus 3.1 percent) that had the largest negative impact, subtracting fully 0.8 percentage points. On the upside, rubber and plastics (2.6 percent) and electricity and gas supply (6.0 percent) stood out. Consequently, overall core prices fell a sizeable 0.5 percent versus April, lowering the annual underlying rate from minus 1.7 percent to minus 2.2 percent.

Despite the May decline, today's update still suggests that the trend in pipeline price pressures is on the turn. It also puts the Swiss RPI at minus 7 and the RPI-P at 15. Overall economic activity is running a little behind forecasts but only due to the surprising weakness of prices.

The rebound in prices is expected to continue in May with a forecast monthly rise of 0.5 percent following April's 0.6 percent jump.

The producer price and import price index focuses on the actual prices of products on the market (transaction price) at the time of the order. The prices of domestic products are taken at the producer or factory level, excluding value added tax and consumption taxes. For imports, prices are collected at the Swiss border, without the value added tax, taxes on consumption and tariffs. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer

The producer price and import price index 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. Producer and import prices are more volatile than consumer prices. While the CPI is the price index with the most impact in setting interest rates, the producer price and import price index provides significant information earlier in the production process. The producer price and import price index 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 producer price and import price index decreases or posts only small increases, but bond prices fall when the index 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.