Industrial product prices were a little softer than expected in September. A 0.3 percent monthly fall matched an unrevised drop in August and put the IPPI 0.4 percent below its level a year ago.
The monthly headline decline was attributable to falls in only four subsectors. Amongst these by far the dominant was energy and petroleum products which decreased 3.6 percent, their steepest downturn since January, and without which prices would have risen 0.2 percent. Chemicals (minus 0.8 percent), lumber and wood (minus 0.2 percent) and fruit, vegetables and feed (also minus 0.2 percent) were the other areas of weakness. Elsewhere, primary non-ferrous metal products (1.3 percent), furniture and fixtures (0.7 percent) and motorized and recreational vehicles (0.6 percent) were the main risers.
By contrast, raw material prices rose quite sharply. Even so, a surprisingly sharp 3.0 percent monthly increase only dented August's steeper revised 6.8 percent nosedive and the RMPI was still a hefty 20.9 percent weaker on the year. The overall index was boosted by an 8.2 percent surge in crude energy product costs, only partially offset by falls in animal and animal products (1.3 percent) and logs, pulpwood, natural rubber and other forestry products (0.6 percent).
Following September's report, industrial product prices are 1.4 percent below their March 2014 peak (and raw material costs some 24.8 percent weaker over the same period). Accordingly, pipeline inflation pressures remain muted and today's update will do nothing to encourage the BoC to adjust whatever timetable it might have for a change in key interest rates.
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.