Both input costs and output prices were very weak in November. Having already dropped 4.2 percent in October, the RMPI fell a further, and steeper than expected, 5.8 percent on the month in November. The index now shows an annual decline of 4.0 percent. At the same time, the IPPI was down (a smaller than generally anticipated) 0.4 percent versus the start of the quarter, its third fall in a row, to reduce its yearly change from 2.4 percent to 1.9 percent.
Inevitably within the IPPI the main downward pressure came from energy and petroleum products where charges were off a monthly 2.3 percent and now show an annual decline of almost 6 percent. Excluding this subsector prices were flat on the month and 3.5 percent higher than in November 2013. The other main negative effects came from chemicals, which were 1.2 percent lower on the month, and primary non-ferrous metal products (minus 0.9 percent). The only increase of note was in motorised and recreational vehicles (0.7 percent).
Energy had an even larger impact on the RMPI within which crude energy costs slumped some 10.6 percent from October. Excluding this category prices were 1.0 percent weaker on the month and 4.0 percent lower on the year. The only other sizeable monthly change was in animals and animal products (minus 2.8 percent).
The weakness of pipeline inflation pressures in November will sit well with a still dovish BoC. Official interest rates could go up this year but for now, and particularly until the impact on the real economy of the slump in oil prices becomes apparent, the central bank will remain more than a little reluctant to tighten.
The Industrial Product Price Index (IPPI) reflects the prices that producers in Canada receive as the goods leave the plant gate. The IPPI excludes indirect taxes and all the costs that occur between the time a good leaves the plant and the time the final user takes possession of it, including the transportation, wholesale, and retail costs.
The IPPI reflects the prices that Canadian producers receive when goods leave the factory gate, that is, what producers receive for their output. This index is similar to the United Kingdom's producer output index. The index includes prices for major commodities sold by manufacturers, but it excludes indirect taxes and items such as transportation and wholesale and retail costs. The index is affected by the foreign exchange rate of the Canadian dollar versus the U.S. dollar, and each month its impact is noted. The RMPI reflects the prices paid by Canadian manufacturers for key raw materials, either domestically or in world markets. It is published simultaneously with the IPPI and, like that index, has a base year of 1997 and is subject to revisions for six months. This index is analogous to the producer input price index published in the United Kingdom.
The IPPI and RMPI measure prices at the producer level before they are passed along to consumers. Since these indexes measure 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.
While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.
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.