Producer and import prices continued their drop in December, falling 0.2 percent from November and 1.8 percent from a year ago, with the year-on-year comparison reflecting broad declines on the production and import sides.

Import prices overall fell 0.5 percent month-on-month and 2.8 percent year-on-year, while producer prices were down 0.1 percent and 1.3 percent in the same time period. Core import prices which exclude volatile prices for items like agricultural products, petroleum, metals, and gas fell 0.3 percent on the month and 2.2 percent year-on-year. The same comparison for PPI saw prices unchanged month-on-month and fall 0.8 percent year-on-year.

Petroleum products led the PPI decline, falling 4.1 percent from November and 8.3 percent versus December of last year. Stone, sand and gravel, salt were 0.5 percent cheaper than a month ago and 0.1 percent from December of last year.

Turning to manufactured products, domestic prices fell 0.1 percent from their level in November and up 0.1 percent from a year ago. Prices for exported goods were unchanged in December versus November and down 1.9 percent from a year ago.

No inflationary pressures are evident in the pipeline, and while there is some choppiness around energy, the broad trend continues to be towards contraction.

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.