CH: Producer and Import Price Index

Fri May 15 02:15:00 CDT 2015

Consensus Actual Previous
M/M % change -0.1% -2.1% 0.2%
Y/Y % change -3.2% -5.2% -3.4%

The combined producer and import price index fell out of bed in April. Prices slumped some 2.1 percent on the month and now show an annual decline of fully 5.2 percent.

Weakness was apparent in both components although the monthly drop in imports costs (3.1 percent) was almost twice that of domestic producer prices (1.6 percent) due to the effects of exchange rate appreciation. Compared with April 2014 imports prices are now off 8.9 percent while the PPI is down 3.5 percent.

Moreover, for once the monthly volatility was only partly due to oil. Hence, although petrol fell fully 6.3 percent, the main downward pressure on the PPI came from declines in machines (4.1 percent), metals (3.6 percent) and information technology, electrical and optical products (2.3 percent). Together these subtracted more than a full percentage point. Indeed, the core PPI slid a sharper 1.7 percent versus quarter-end and was 2.7 percent below its year ago level.

Similarly, the monthly drop in core import prices (3.4 percent) was more marked than in total imports.

For the composite index underlying prices were off 2.1 percent from March and were 3.6 percent lower on the year after a 1.7 percent fall last time. This will make for very unpleasant reading at the SNB and suggests that getting CPI inflation (minus 0.4 percent in April) back above zero on a sustainable basis will be even harder than originally thought.

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.