Industrial product prices resumed their downward spiral in February. A steeper than expected 1.1 percent fall on the month was the sixth in the last seven months and, with base effects strongly negative, enough to see annual IPPI inflation slump from 1.7 percent to minus 1.4 percent.
Energy and petroleum products posted a 4.2 percent monthly decrease and without this, the IPPI would have fallen 0.7 percent versus January and risen 1.6 percent on the year. Elsewhere negative monthly contributions were made by chemicals (minus 2.5 percent) and motorised and recreational vehicles (minus 1.8 percent). Support was provided by fish, meat and dairy products (1.2 percent), primary non-ferrous metal products (0.8 percent) and the exchange rate which alone boosted the monthly change in the overall index by 0.7 percentage points.
Meanwhile, raw material costs continued to head south. February saw the RMPI decline a further 2.6 percent versus January to leave it some 15.1 percent below its level a year ago. Crude energy products were down 9.4 percent and effectively accounted for the entire monthly decline. Crop products (minus 1.3 percent) and non-metallic minerals (minus 1.1 percent) also weighed but metal ores, concentrated and scrap (3.0 percent) provided a partial offset.
The ongoing weakness of pipeline pressures continues to argue in favour of a soft CPI profile suggesting that the BoC should not have a problem easing again should the need arise. For now however, the economy looks to be picking up some momentum and stable official interest rates look very likely through year-end.
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.