The June PPIs were surprisingly weak and leave a still generally soft picture of pipeline inflation pressures.

Factory gate prices fell 0.3 percent on the month, well short of the market consensus and the sharpest drop so far in 2024. As a result, the annual inflation rate eased from 1.7 percent to 1.4 percent although this was only a 2-month low. Prices of coke and petroleum products decreased 3.2 percent while food was down 0.2 percent and other outputs 0.3 percent. Consequently, core prices edged 0.1 percent higher, nudging up the underlying yearly rate by a tick to 1.1 percent.

At the same time, raw material and fuel costs fell 0.8 percent versus May, their steepest decline since June 2023. However, positive base effects lifted yearly inflation from minus 0.7 percent to minus 0.4 percent, its strongest reading since May 2023. Prices of crude petroleum, natural gas and metal ores fell a monthly 7.9 percent while domestic and imported food dropped 1.1 percent and 2.0 percent respectively. There were no increases of any size.

Today's report offers a reminder that even though manufacturing seems to be on the turn, inflation in the sector is yet not an issue to worry the BoE MPC. Today's data put the UK's RPI at minus 1 and the RPI-P at 17, meaning that real economic activity is running slightly ahead of market forecasts.

Both input and output prices are expected to rise 0.1 percent on the month.

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.