CH: Producer and Import Price Index

Tue Jul 14 02:15:00 CDT 2015

Consensus Actual Previous
M/M % change 0.0% -0.1% -0.8%
Y/Y % change -6.1% -6.1% -6.0%

The combined producer and import price index behaved much as expected in June. A 0.1 percent monthly dip was the third fall in a row (and the tenth in the last eleven months) and put the headline measure 6.1 percent below its level a year ago, matching the record annual decline posted in July 2009.

The latest monthly decrease was wholly attributable to a 0.2 percent slide in import costs as domestic producer prices were flat. Compared with June 2014 import prices were down fully 10.0 percent or more than double the 4.3 percent decline recorded by the PPI.

For the PPI, a 0.2 percent monthly fall in energy prices was offset by generally small rises elsewhere while the main contribution to the decrease in import charges came from a 0.4 percent drop in charges for intermediates and a 3.9 percent slump in food prices.

As a result, underlying prices in the composite basket were flat on the month to leave their annual rate of decline also steady at 4.8 percent. Core deflationary pressures may not be getting worse but there is nothing here to suggest that a return to sustainably positive CPI inflation is any closer.

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.