Producer prices fell for a seventh straight month in May. Following an unrevised 1.0 percent monthly drop in April, the headline index decreased a further 0.2 percent, slightly steeper than the market consensus. However, in line with the recent pattern, base effects were again strongly positive and lifted annual inflation from minus 5.7 percent to minus 4.2 percent, its least negative reading since June 2023.

That said, weaker energy prices (minus 1.1 percent) ensured that the overall monthly decline continued to mask what has become a steady, if still quite subdued, uptrend in underlying prices. Hence, excluding this category, the PPI rose 0.1 percent, its fifth advance in as many months. As a result, the yearly core rate increased from minus 0.9 percent to minus 0.4 percent. Durable consumer goods dipped 0.1 percent versus April but non-durables, capital goods and intermediates all edged 0.1 percent higher.

The May data will not trouble the ECB. Core PPI inflation looks to have turned but prices are rising from such weak levels that, for now at least, they offer no threat to the 2 percent HICP inflation target. Indeed, as the June PMI survey makes clear, Eurozone manufacturing remains in the doldrums. The region's RPI now stands at minus 11 and the RPI-P at minus 24. Economic activity in general is still falling somewhat short of market forecasts.

The yearly fall in prices is expected to ease to 4.1 percent in May, down from 5.7 percent in April.

The Producer Prices Index (PPI) measures the gross trading price of industrial goods sold into the domestic market. 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 covers manufacturing, mining and quarrying and utilities but excludes construction. The headline index can be very volatile so financial markets look at a core index to better understand underlying trends. This excludes the often highly erratic energy subsector.

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 HICP. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

Like the HICP, Eurostat's producer price index is also harmonized across the EMU and the larger EU membership. Producer price indexes provide another layer of information on inflation and can be an early warning of inflationary pressures building in the economy. They also record the evolution of prices over longer periods of time. The PPI reports on input prices or commodity prices and can tell whether producers are able to pass through increases in costs to their customers.

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.

Producer prices are more volatile than consumer prices. The CPI includes services components which are more stable than goods, while the PPI does not. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Partly because of this, financial markets will look to the core (ex-energy) index to provide a better guide to underlying trends.