Producer prices of industrial products in December 2024 showed unexpected trends, with a 0.8 percent year-over-year increase and a slight 0.1 percent month-over-month decline. These figures fell short of consensus estimates, which had anticipated a higher 1.0 percent year-over-year rise and a 0.4 percent month-over-month increase.

A 1.8 percent year-on-year rise in capital goods prices was one of the drivers of the annual increase in producer prices. Within this category, machinery prices rose 2.0 percent while prices of motor vehicles trailers and semi-trailers were up 1.4 percent from December 2023.

Also contributing significantly was a 2.6 percent year-on-year rise in prices of non-durable consumer goods, led by food prices, which rose 3.1 percent.

Intermediate goods remained largely stable, with slight year-over-year growth of 0.1 percent in December. Notable increases were recorded for construction materials, such as stone and sand, while metals and chemicals experienced slight declines. Durable and non-durable consumer goods saw modest price increases, driven by food and machinery costs.

Energy prices muted overall annual producer price inflation in December, falling 0.2 percent from December 2023. Within the category, natural gas prices fell 5.6 percent year-over-year, electricity 1.3 percent, mineral oil products 4.0 percent, and motor fuel 3.9 percent. Conversely, district heating prices surged by 17.2 percent.

Annual average prices for 2024 saw a 1.8 percent reduction compared to 2023, primarily due to falling energy prices, which dropped 6.2 percent on average. Excluding energy, annual average producer prices increased marginally by 0.3 percent annually. Natural gas and electricity prices led the the decline in average energy prices, falling 13.3 percent and 10.3 percent, respectively, in 2024 compared to 2023. Among consumer goods, butter and confectionery prices rose significantly, while sugar and pork prices declined.

The overall trend indicates a rebalancing of input costs, where energy price reduction supported price moderation in certain categories while rising food and capital goods prices reflected continued inflationary pressures in specific sectors. This latest update takes the RPI to 8 and the RPI-P to 0, within market expectations of the German economy.

German producer prices were up 0.1 percent on year in November, their first annual increase since June 2023. The consensus forecast for German PPI in December sees a more impressive increase of 1.0 percent on the year, so the period of wholesale price deflation appears to have ended. Forecasters also look for an increase of 0.4 percent month on month in December.

The Producer Price Index (PPI) measures the price of industrial and commercial goods produced and sold domestically (excluding turnover tax). About 1,250 types of goods are used to calculate the index and prices are reported by a total of 5,000 enterprises under fixed contractual conditions. 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 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).

Because the index of producer prices measures price changes at an early stage in the economic process, it can serve as an indicator of future inflation trends. The producer price index and its sub-indexes are often used in business contracts for the adjustment of recurring payments. They also are used to deflate other values of economic statistics like the production index. It should be noted that the PPI excludes construction. These price statistics cover both the sales of industrial products to domestic buyers at different stages in the economic process and the sales between industrial enterprises.

The PPI provides a key measure of inflation alongside the consumer price indexes and GDP deflators. 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 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 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.