CH: Producer and Import Price Index

Fri Nov 13 02:15:00 CST 2015

Consensus Actual Previous
M/M % change -0.2% 0.2% -0.1%
Y/Y % change -6.8% -6.6% -6.8%

The combined producer and import price index unexpectedly rose in October. A 0.2 percent monthly increase was the first gain of any size since March but only strong enough to lift the measure's annual growth rate from minus 6.8 percent to minus 6.6 percent.

The monthly headline increase was wholly attributable to a 0.3 percent rise in domestic producer prices although these still stand some 4.5 percent lower on the year. Most components showed little change versus September, the main exception, as usual, being petroleum products (minus 2.5 percent). As a result, the core PPI was up a slightly larger 0.4 percent on the month. Imports costs continued to slide but a 0.1 percent dip here was more than accounted for by a 2.6 percent decrease in petrol. The annual import deflation rate weighed in at fully 11.0 percent.

For the overall index, core prices were 0.4 percent firmer than in September and, at 4.9 percent, the yearly deflation rate was 3 ticks less than last time. However, the modest improvement in the underlying picture does nothing to impact what remains a very weak outlook for consumer prices well into 2016.

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.