February industrial product prices posted their first monthly rise in half a year. A sharper than expected 1.8 percent advance lifted annual IPPI inflation from minus 2.1 percent to minus 1.6 percent, still its third consecutive reading below zero. At the same time the RMPI surged some 6.1 percent versus January although this left a 21.8 percent yearly decline, just a tick shallower than last time.
The main boost to the monthly change in the IPPI came from petroleum products where prices jumped 8.8 percent and without which the headline index would have risen only 0.7 percent from January (and increased 3.3 percent from February 2014). The other main positive effects came from motorized and recreational vehicles (2.2 percent), largely due to the depreciation of the local currency. Elsewhere primary non-ferrous metal products (1.2 percent) posted a third consecutive increase and chemicals (0.5 percent) saw their first gain since last September.
Meanwhile the monthly increase in the RMPI was dominated by crude energy products (16.0 percent) and without which the overall index would have risen just 0.3 percent (and 2.2 percent on the year). The only other gain of note was in crop products (1.9 percent). The sole fall was in animals and animal products (1.2 percent).
Despite the surprising strength of both the IPPI and the RMPI BoC policy will probably retain a dovish bias for now. Tomorrow's January GDP report looks likely to see a second contraction in three months and the central bank's 1.5 percent first quarter growth forecast is looking increasingly optimistic.
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.