CH: Producer and Import Price Index

August 15, 2016 02:15 CDT

Actual Previous
M/M % change -0.1% 0.1%
Y/Y % change -0.8% -1.0%

The combined producer and import price index declined for the first time in 7 months and was down 0.1 percent on the month in July. Despite the small monthly drop, the annual combined index deflation rate was reduced by 0.2 percentage points to a minus 0.8 percent, the closest the annual rate has been to zero in two years.

The slight monthly decrease in prices was mainly due to lower prices for petroleum products, which were down 2.9 percent on the import front, for an annual rate of minus 22.7 percent, and down 3.1 percent in domestic petroleum products, for a 19.7 percent drop on the year here. Both component indexes thus declined an identical 0.1 percent, putting the annual rate at minus 0.5 percent for the producer price index and at minus 1.5 percent for the import price index.

Domestically, prices of manufactured products as a whole fell 0.1 percent on the month, with no other significantly large changes recorded by any manufacturing sub-group. The biggest decline by a non-petroleum sub-group of manufacturing was recorded by computer, electronic, optical ans watches products, down 0.3 percent on the month, and outside of manufacturing, garbage collection prices continued to tumble and were down 2.9 percent on the month. In imports, agricultural prices fell 2.3 percent on the month and were down 3.6 percent on the year, while coal, crude oil and natural gas prices rose 4.1 percent, putting the annual rate for that component at minus 22.7 percent.

Core producer prices also declined 0.1 percent, but the core annual deflation was reduced by one tick to a minus 0.5 percent. The core import prices rate was flat on the month and also down 0.5 percent on the year.

For the combined index, underlying prices were only flat on the month, but as in previous months, favorable base effects helped, and the core annual deflation rate was cut by half to a minus 0.2 percent.

Following last week's report of a rise in the annual inflation rate for consumers to minus 0.2 percent, today's report on the increase in the annual inflation rate for import and producer prices makes the SNB's forecast of a minus 0.4 percent inflation rate for 2016 look quite plausible.

The producer price and import price index focuses on the actual prices of products on the market (transaction price) at the time of the order. The prices of domestic products are taken at the producer or factory level, excluding value added tax and consumption taxes. For imports, prices are collected at the Swiss border, without the value added tax, taxes on consumption and tariffs. Changes in the index provide a guide to inflation from the point of view of the product's producer/manufacturer

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.