CH: Producer and Import Price Index

Mon Sep 14 02:15:00 CDT 2015

Consensus Actual Previous
M/M % change -0.5% -0.7% -0.3%
Y/Y % change -6.7% -6.8% -6.4%

The combined producer and import price index continued to spiral downwards in August. A 0.7 percent monthly drop was the fifth consecutive decline and the seventh so far in 2015. Annual growth of the headline measure slid from minus 6.4 percent in July to minus 6.8 percent.

Both components were lower on the month although the drop in import prices (1.0 percent) was significantly sharper than in domestic producer prices (0.6 percent). Compared with August 2014, the former now shows an 11.2 percent slump while the latter was off 4.8 percent.

Within the PPI, energy prices fell 1.6 percent from their level in July and while intermediates and consumer durables were flat, consumer non-durables fell a hefty 1.1 percent too. The core PPI was 0.5 percent lower on the month and 4.1 percent weaker on the year. Import costs were hit by a near-8 percent drop in energy charges which alone subtracted 0.6 percentage points from their monthly change. The core import price index was down only 0.4 percent on the month and 8.0 percent versus August 2914.

For the combined index the underlying component decreased 0.5 percent from July, a steep enough drop to see overall core prices some 5.2 percent weaker on the year after a 4.9 percent decline last time. The ongoing accumulation of deflationary pipeline pressures leaves open the possibility of another SNB interest rate cut and the central bank's quarterly Monetary Policy Assessment on Thursday should again be decidedly dovish.

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.