A surge in energy prices was the main driver in pushing producer prices higher in November in the domestic market where they rose 1.3 percent from October, while falling 0.3 percent from November of last year.

Energy prices were 3.1 percent higher in November than a month ago while falling 2.6 percent year-on-year. Higher energy prices are not isolated to the Italian economy, with France also seeing a month-on-month burst in prices.

Among other major sectors, consumer goods prices at the production level rose 0.3 percent in November and 1.3 percent from a year ago, led by higher prices for consumer durables. These rose 1.1 month-on-month and 1.8 percent year-on-year domestically. Non-durables prices were up a more modest 0.2 percent from October and 1.1 percent from November of last year.

Capital- and intermediate goods rose 0.2 percent and 0.3 percent from their month ago level, while gaining 1.1 percent and 0.8 percent year-on-year.

Excluding energy, prices for the main industrial groups (MIG) were up 0.3 percent from October and 1.0 percent from a year ago.

Clearly energy prices are the main driver of the prices in production prices, while no outsized prices gains are evident among the MIG. Energy prices bear watching, particularly if these become more widespread in Europe.

The producer price indices (PPI) measure transaction prices, exclusive of VAT, for goods from industrial activities sold on the Italian market. Construction is excluded. 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.

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 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.