Producer prices climbed much more steeply than expected in July. Following a slightly sharper revised 0.6 percent monthly increase in June, the headline index jumped 0.8 percent, fully 0.5 percentage points above the market consensus and its largest rise since December 2022. Annual inflation increased from minus 3.3 percent to minus 2.1 percent, its least negative reading since May 2023.

However, the overall monthly bounce was wholly attributable to energy where prices spiked 2.5 percent. Excluding this category, the PPI actually dipped 0.1 percent, its first decline in 2024 although positive base effects still saw the yearly core rate (0.2 percent) move back above zero for the first time since October last year. Capital goods were only flat on the month while intermediates, consumer durables and non-durables all eased 0.1 percent.

Accordingly, the headline data paint a misleadingly firm picture of underlying pipeline pressures in Eurozone manufacturing. The sector remains mired in recession and, if the latest business surveys are anything to go by, is likely to remain so for some time yet. Still, with the region's RPI now at 21 and the RPI-P at 22, at least economic activity in general is performing rather more strongly than market forecasts.

Producer prices have been climbing out of deep contraction and are expected to improve to minus 2.5 percent on the year in July from minus 3.2 percent in June. The monthly showing, at a consensus gain of 0.3 in July, rose 0.5 percent in June.

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.