CH: Producer and Import Price Index

Mon Jan 19 02:15:00 CST 2015

Consensus Actual Previous
M/M % change -0.7% -0.4% -0.7%
Y/Y % change -2.4% -2.1% -1.6%

The combined producer and import price index fell for a third consecutive month in December. A 0.4 percent drop versus November was somewhat shallower than expected but still steep enough to see the yearly change in the headline measure decline from minus 1.6 percent to minus 2.1 percent. For calendar 2014 a minus 1.1 percent annual rate was the weakest since 2009.

Domestic producer prices were down 0.2 percent from their mid-quarter level and 1.7 percent lower than in December 2013. The monthly slide here was dominated by a 13.3 percent slump in petrol costs which alone accounted for half of the overall decline. Elsewhere prices were either stable or posted small falls apart from electrical equipment which saw a 0.2 percent advance.

Import costs were off 0.9 percent versus November and 3.0 percent weaker on the year. Again, petrol (minus 11.1 percent) was easily the most volatile subsector and most other categories were relatively stable.

As a result, the core headline index was unchanged from November and, at minus 1.1 percent, its annual rate of decline also matched the previous period's print. Looking ahead, the dramatic appreciation of the CHF prompted by last week's shock change in SNB policy should guarantee that pipeline inflation remains in negative territory for some considerable time yet.

The headline composite index combines domestic producer prices and import prices into a single measure. This can be volatile and financial markets will normally look at the core index for a more reliable guide to underlying developments.

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. Producer prices are more volatile than consumer prices. 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. 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.