Cost pressures within the production pipeline continued to ease toward the end of 2025. Producer input prices rose by 0.8 percent in the year to December, slowing from 1.1 percent in November, signalling a moderation in the price of raw materials and energy faced by manufacturers. The monthly decline of 0.2 percent in input prices reinforces this downward trend and suggests improving cost conditions at the upstream level.

Despite softer input costs, producer output prices remained elevated. Factory gate inflation was unchanged at 3.4 percent year-over-year, with no movement recorded on a monthly basis. This stability indicates that firms are maintaining selling prices, possibly to protect margins after a prolonged period of high cost pressures.

Import prices rose by 1.3 percent over the year, pointing to lingering external price influences, including exchange rate dynamics and global supply conditions. Overall, the data suggest a gradual easing of cost pressures entering the production process, but limited pass-through to output prices so far. This disconnect implies that consumer price inflation may remain sticky in the short term, even as upstream inflation shows clearer signs of cooling.

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.