CH: Producer and Import Price Index

Mon Mar 16 03:15:00 CDT 2015

Consensus Actual Previous
M/M % change -1.0% -1.4% -0.6%
Y/Y % change -3.3% -3.6% -2.7%

The combined producer and import price index fell 1.4 percent on the month in February. The latest decline, which was slightly steeper than expected, was the fifth in a row and put the composite index 3.6 percent below its level a year ago.

Domestic producer prices were down 0.7 percent versus January and 2.2 percent weaker on the year. Within this energy was 2.7 percent cheaper on the month and intermediates were off 1.3 percent. Capital and consumer goods were unchanged but the core PPI still fell 0.5 percent from the start of the year and was 1.2 percent lower than in February 2014.

Meantime import prices were much weaker as the effects of January's sharp appreciation of the CHF continued to feed through. A monthly drop of some 3.0 percent saw prices nearly 7 percent lower on the year. Energy was off a monthly 3.2 percent and even core import charges decreased 1.8 percent.

Indeed, underlying deflationary pressures were significantly more marked with the core headline index falling 0.8 percent versus January and 1.6 percent on the year after a 1.1 percent annual decline last time. Today's figures suggest that CPI inflation (annual rate minus 0.8 percent in February) has further to fall over coming months.

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.