Industrial product prices were again soft in November. A 0.2 percent monthly drop was on the weak side of expectations and, following an unrevised 0.5 percent decline in October, put the IPPI also 0.2 percent lower on the year.
Within the overall basket, eleven categories posted monthly rises, eight were down and two unchanged. Downward pressure was mainly apparent in primary non-ferrous metal products where prices were off fully 3.5 percent. Elsewhere, energy and petroleum products dropped 0.4 percent, miscellaneous products 0.5 percent and meat, fish and dairy products 1.5 percent. Excluding energy and petroleum products the IPPI still declined 0.2 percent versus October but was 3.3 percent firmer on the year. The principal gainer was motorised vehicles (up 1.2 percent on the month).
Meantime, raw material costs resumed their spiral south with a surprisingly sharp 4.0 percent monthly slump that left the RMPI 16.3 percent weaker than in November 2014. On the month, crude energy (minus 5.7 percent) did most of the damage and without this subsector prices were 2.8 percent lower versus October and 4.7 percent weaker on the year. Animals and animal products also fell 4.4 percent and metal ores, concentrates and scrap 3.9 percent.
Today's update on pipeline prices does nothing to suggest that CPI inflation will be a problem for the BoC should it decide to give the economy an extra monetary boost in 2016.
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.