Industrial product prices and raw material costs continued to spiral south in January. The IPPI was down a smaller than expected 0.4 percent on the month to yield an annual drop of 2.2 percent but the RMPI slumped fully 7.7 percent versus December and now shows a yearly decline of some 21.8 percent, the steepest annual drop since September 2009.
Within the IPPI, energy and petroleum charges were 11.2 percent lower than in December (minus 29.2 percent on the year) and dominated the change in the overall index. Indeed, excluding this category the IPPI was 1.5 percent firmer on the month and 3.4 percent higher on the year. The only other monthly decline was in chemicals and chemical products (1.6 percent). The most pronounced monthly gain was in primary non-ferrous metal products (4.6 percent) although motorised and recreational vehicles (3.5 percent) and pulp and paper products as well as electrical, electronic, audio-visual and telecommunications products (both 1.8 percent) were also robust.
The impact of the weaker energy market was even more apparent in the RMPI. Hence, without a 19.1 percent nosedive in crude energy products, the overall index would have risen 0.5 percent versus December and increased 4.0 percent on the year. The only other monthly fall was in animals and animal products (0.8 percent). All the other subsectors posted monthly advances of between 0.2 percent and 1.7 percent).
Although the IPPI fell less than anticipated, the general tone of today's report is clearly very soft and bodes well for a subdued CPI profile over coming months.
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.