Producer prices continued to climb sharply in August. Following a slightly smaller revised 0.7 percent monthly increase in July, the headline index rose a further 0.6 percent, its third straight increase and double the market consensus. However, negative base effects still saw annual inflation ease from minus 2.2 percent to minus 2.3 percent.

As usual, the overall monthly change was dominated by energy where prices rose 1.9 percent after a 2.6 percent spike in July. Excluding this category, the PPI actually dipped 0.1 percent, its first decline in 2024 following a small positive revision to the previous month. The yearly core rate was unchanged at 0.3 percent, only its second positive print since October last year. Consumer goods were flat on the month, capital goods were up 0.1 percent and intermediates down 0.1 percent.

Accordingly, the headline data again paint a misleadingly firm picture of underlying pipeline pressures in Eurozone manufacturing. The sector remains mired in recession and looks likely to stay that way this quarter. That said, with the region's RPI now at 2 and the RPI-P at 14, at least economic activity in general is keeping up with market forecasts.

Producer prices are expected to have fallen deeper into contraction to minus 2.4 percent on the year in August from minus 2.1 percent in July. The monthly showing, at a consensus of 0.3 in August, rose 0.8 percent in July.

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.