In December 2024, producer price dynamics highlighted a gradual easing of cost pressures across the supply chain. Input prices fell by 1.5 percent annually, softening from November's sharper 2.1 percent decline, while factory gate prices edged up by 0.1 percent, marking a shift from a 0.5 percent drop in the prior month. Monthly gains of 0.1 percent in both input and output prices suggest a slight rebound, driven by increased costs in parts, equipment, and refined petroleum products.

Service producer prices, however, reflected broader sectoral moderation, rising by 2.9 percent annually in the fourth quarter, a deceleration from 3.7 percent in the third quarter. This indicates that inflationary pressures in services-often a sticky component-are beginning to cool, aligning with broader disinflationary trends.

The interplay between declining input costs and stabilising output prices could offer some relief to manufacturers, easing margin pressures. However, the upward contributions from specific sectors like petroleum products point to lingering cost volatility. Overall, the data suggests improving supply chain conditions, but persistent sector-specific pressures underline the importance of vigilance in monitoring inflation drivers. The latest update leaves the RPI at minus 26 and the RPI-P at minus 31. This means that economic activities, in general, are lagging behind market expectations.

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.