CH: Producer and Import Price Index

Thu Apr 16 02:15:00 CDT 2015

Actual Previous
M/M % change 0.2% -1.4%
Y/Y % change -3.4% -3.6%

The March combined producer and import price index posted its first rise since June last year. A 0.2 percent monthly increase in the headline index reduced its annual rate of decline from 3.6 percent to 3.4 percent.

Domestic producer prices edged up 0.1 percent versus February but were still 2.1 percent lower on the year. Almost inevitably the monthly increase was led by petrol for which charges were up some 17.2 percent and alone added nearly 0.2 percentage points to the change in the total PPI. Otherwise volatility amongst the main market sectors was very limited and ranged between minus 0.1 percent and 0.1 percent. The core PPI fell 0.1 percent from mid-quarter and was 0.4 percent lower on the year.

The import cost component climbed a sharper 0.5 percent from February and now registers a yearly drop of 6.4 percent. Again, petrol (16.3 percent) dominated the monthly gain. Outside of this, intermediates and consumer non-durables fell 0.2 percent and 1.2 percent respectively while the other major sectors were only flat.

Accordingly, underlying pipeline deflationary pressures became somewhat more intense. Hence, for overall prices the core index continued to weaken and a 0.2 percent monthly decline was enough to shave another tick off its yearly rate which now stands at minus 1.7 percent.

There is nothing here to suggest that annual CPI inflation will not remain below zero throughout 2015.

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.