Industrial product prices rose for a third successive month in July. A 0.7 percent monthly increase followed an unrevised 0.5 percent gain last time and lifted annual IPPI inflation from minus 0.9 percent to 0.1 percent, its first positive reading since November 2014.
The monthly headline bounce was due to rises in seventeen of the twenty-one reporting commodity groups within which motorized and recreational vehicles (2.5 percent), chemicals and chemical products (1.1 percent) and electrical, electronic, audio-visual and telecommunication products (1.3 percent) stood out. Energy and petroleum products fell 1.1 percent and without this category the IPPI would have climbed 1.0 percent versus June and 3.8 percent from July 2014.
Meantime, raw material costs fell sharply. Following a revised 0.2 percent monthly rise in June a 5.9 percent slump was the steepest since January and left the RMPI some 21.2 percent below its level a year ago.
Inevitably weakness in the energy sector did much of the damage and crude energy product prices were off fully 13 percent versus the end of last quarter. Excluding this subsector the RMPI would have fallen just 0.3 percent on the month and dropped 2.7 percent from July 2014. Elsewhere within the RMPI basket animals and animal products declined 1.4 percent but crop products rose 2.9 percent.
Until today, both measures of pipeline inflation pressures had posted negative annual growth rates every month since at least the start of the year. The yearly IPPI rate has now moved above zero, but only just. There is nothing here to signal any real threat from this quarter to the BoC's price stability goals.
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.