CH: Producer and Import Price Index

Thu Apr 14 02:15:00 CDT 2016

Consensus Actual Previous
M/M % change -0.2% 0.0% -0.6%
Y/Y % change -5.0% -4.7% -4.6%

The March combined producer and import price index avoided falling for the first time since November 2015. However, with prices rising a year ago, no change on the month was still enough to see the annual deflation rate edge a tick higher to 4.7 percent.

The monthly stability of the headline index masked a minimal 0.1 percent rise in domestic producer prices. Import charges showed no change. Compared with March 2015 the PPI was 3.5 percent lower while import costs were down a much sharper 7.5 percent.

Within the PPI the largest monthly change was again in petrol (1.8 percent) and most other subsectors were broadly flat. Indeed, the core PPI also held steady at its mid-quarter level to yield a 3.2 percent annual decline. Import prices were lifted by a 3.2 percent monthly rise in agriculture, offset by a 0.6 percent slide in energy. The core index here dipped 0.1 percent versus February.

For the composite index, underlying prices were steady on the month and 3.7 percent weaker on the year after a 3.9 percent drop in February. Deflationary pressures may not be getting any worse but it is far too early to say that the corner has been turned.

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.