September producer prices were weak. Input costs fell by 2.3 percent annually, compared to a 1.0 percent decrease in August, while output (factory gate) prices dropped by 0.7 percent year-over-year, reversing from a revised 0.3 percent increase in August. This decrease was largely driven by significant falls in the prices of crude oil inputs, which plunged by 23.3 percent year-over-year. Fuel prices followed suit, falling by 11.2 percent, with electricity costs for the domestic market being a key factor.

Over the month, output prices declined by 0.5 percent, marginally exceeding market expectations of a 0.3 percent decrease, while input prices dropped a full 1 .0 percent, double the anticipated decline. These sharper-than-expected decreases suggest easing cost pressures for producers, potentially reflecting weakening demand.

However, there were some upward pressures, particularly from domestic food inputs, which rose by 1.7 percent year-over-year, largely due to poor potato crop yields. Services producer prices saw a 3.3 percent annual rise between July and September, slightly higher than the previous quarter. The largest downward contributions came from chemicals and paper products though these were somewhat offset by increases in"other outputs," including soft drinks.

Overall, today's data show sustained weakness in factory gate price pressures which, after September's unexpectedly soft CPI, can only add to speculation about a cut in Bank Rate next month. The update takes the RPI to minus 14, showing that the UK economy is performing slightly below market expectations. However with the RPI-P at 7, this also means that the undershoot is wholly attributable to surprisingly weak prices.

Output prices are expected to drop 0.3 percent on the month and input prices a steeper 0.5 percent, both measures matching their August changes.

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.