Industrial product prices fell a steeper than expected monthly 0.5 percent In October following a marginally sharper revised 0.4 percent drop in September. What was the third successive decline put the IPPI 0.4 percent below its level a year ago, matching its annual rate at the end of last quarter.
Eighteen of the major subsectors posted monthly decreases with motorised and recreational vehicles (1.1 percent) leading the way. Other significant falls were seen in primary ferrous metals (0.9 percent), meat, fish and dairy products (0.6 percent) and primary non-ferrous metals (0.5 percent). The exchange rate also subtracted 0.3 percentage points from the monthly change. There were no gains of any size and excluding energy and petroleum products (minus 1.0 percent) the IPPI was down 0.4 percent on the month and up 3.6 percent on the year.
Meanwhile, raw material costs posted a relatively modest 0.4 percent monthly increase after a weaker revised 2.4 percent gain last time. Annual RMPI growth was minus 17.5 percent, up from minus 21.3 percent in September. The principal monthly moves were in crude energy (2.4 percent), logs, pulpwood, natural rubber and other forestry products (1.5 percent) and animals and animal products (minus 2.8 percent). Excluding crude energy the RMPI fell 0.8 percent versus September and was 3.1 percent lower on the year.
Today's update on pipeline pressures suggests little change in underlying CPI trends over the foreseeable future. Much the same applies to BoC policy.
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.