The combined producer and import price index unexpectedly fell again in October. Following a 0.1 percent monthly dip in September, the headline index dropped 0.3 percent, reducing the annual inflation rate from minus 1.3 percent to minus 1.8 percent, a 4-month low.

Domestic prices also declined 0.3 percent, trimming their yearly rate from minus 0.2 percent to minus 0.5 percent. Import prices were down a steeper 0.4 percent, lowering their annual rate from minus 3.4 percent to minus 4.4 percent.

Within the PPI, the main monthly falls were posted by petroleum products (3.1 percent) and information and electronic and optical products (1.1 percent). Import prices were similarly driven lower mainly by petroleum which slumped a further 4.8 percent. As a result, total core prices also dropped a monthly 0.3 percent, reducing the annual underlying rate from minus 0.8 percent to minus 1.1 percent.

Pipeline price pressures remain very soft and today's update and will further boost speculation about another cut in the SNB's policy rate in December. It also lowers the Swiss RPI to minus 35 and the RPI-P to minus 25. Both gauges show overall economic activity falling quite well short of expectations.

Prices are expected to edge up 0.1 percent on the month after a 0.1 percent fall in September.

The producer price and import price index focuses on the actual prices of products on the market (transaction price) at the time of the order. The prices of domestic products are taken at the producer or factory level, excluding value added tax and consumption taxes. For imports, prices are collected at the Swiss border, without the value added tax, taxes on consumption and tariffs. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer

The producer price and import price index 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. Producer and import prices are more volatile than consumer prices. While the CPI is the price index with the most impact in setting interest rates, the producer price and import price index provides significant information earlier in the production process. The producer price and import price index 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 they 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 producer price and import price index decreases or posts only small increases, but bond prices fall when the index 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.