Producer input prices showed a moderate recovery in November, with a flat monthly reading undershooting forecasts and reducing the annual decline to 1.9 percent from 2.4 percent in October. Crude oil provided the largest boost to the yearly rate with inflation here jumping from minus 21.3 percent to minus 14.1 percent. This more than offset pressures from other inputs like fuel and"other parts and equipment."

Yearly output price inflation also rose to minus 0.6 percent from minus 0.9 percent. Monthly prices increased by 0.3 percent, just 0.1 percentage point above the consensus forecast and mainly due to a 2.7 percent bounce in refined petroleum products. Core prices were flat on the month, leaving their yearly change at 1.6 percent.

The November update again shows inflationary pressures in manufacturing remaining soft and no threat to the BoE's inflation target. It also puts the UK RPI at 1 and the RPI-P at minus 1, meaning that economic activity in general is performing much as expected.

Both input and output prices are expected to rise 0.2 percent versus October.

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.