Producer prices fell in September for the first time since May. A 0.6 percent monthly drop matched the market consensus, reversed an unrevised 0.6 percent rise in August and reduced the yearly inflation rate from minus 2.3 percent to minus 3.4 percent, a 4-month low.

However, as usual, the overall monthly change was dominated by energy where prices decreased 1.9 percent after a 1.8 percent bounce in August. Excluding this category, the PPI was only stable, leaving an essentially flat profile since June. However, with base effects quite strongly positive, this was still enough to boost the yearly core rate from 0.4 percent to 0.6 percent, extending the unbroken uptrend that began in April. Consumer goods were up 0.2 percent on the month while intermediates were unchanged and capital goods 0.1 percent softer.

The September PPI update reinforces the view that the region's pipeline pressures in manufacturing are well past their weakest point. That said, current trends remain soft and certainly no threat to the ECB's 2 percent HICP target. Today's report also puts the Eurozone RPI at 26 and the RPI-P at 19, showing recent economic activity in general moving somewhat ahead of market forecasts.

Deflation in producer prices is seen continuing in September with a forecast 0.6 percent monthly drop that would reduce the yearly rate to minus 3.4 percent.

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.