Highlights
Producer prices were unchanged on the month at the start of the current quarter, a performance that also left the annual rate of decline steady at 7.6 percent. The steepest 12-month fall was recorded in July at 7.8 percent.
Energy prices were up 0.3 percent from September leaving the non-energy PPI to edge 0.1 percent lower on the month and stand 3.3 percent weaker on the year, in line with its September pace.
Other upside pressure on the monthly change in the headline index came from basic goods (0.2 percent) and durable consumer goods (0.1 percent). By contrast, there were falls in the prices of capital goods (0.1 percent) and consumer non-durables (0.4 percent). Total consumer goods were off 0.3 percent.
The recent pick-up in economic activity has accompanied a slight firming in manufacturers' pricing expectations. However, in general conditions remain far too competitive to accommodate any significant price hikes and, moreover, capacity utilisation rates are still historically very low.
Today's data do nothing to alter a benign outlook for pipeline cost pressures faced by German industry. By all means base effects will see the annual PPI rate gravitate towards positive territory over coming months but, as the latest decline in the core index illustrates, the underlying picture is as soft as ever.
Definition The producer price index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers.
Why Investor's Care 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.