CH: Producer and Import Price Index

Wed Jun 13 02:15:00 CDT 2018

Actual Previous
M/M % change 0.2% 0.4%
Y/Y % change 3.2% 2.7%

The combined producer and import price index rose 0.2 percent on the month in May. Following a 0.4 percent gain in April, this lifted the annual inflation rate from 2.7 percent to 3.2 percent, its highest mark in nearly a decade.

However, as seen in previous months, May's advance was dominated by import prices which jumped fully 1.2 percent versus April to stand 6.4 percent above their level a year ago. By contrast, domestic producer prices fell 0.3 percent for an annual rate of 1.6 percent, up just a tick from last time.

In fact, underlying developments were significantly weaker as sharply more expensive petrol added 0.1 percentage points to the monthly change in the PPI and some 0.4 percentage points to import prices. The core PPI fell 0.4 percent on the month and was only 0.9 percent higher on the year.

According, the underlying composite index was similarly soft, recording a 0.2 percent monthly decline and a 1.8 percent yearly rise, matching its April outturn. Today's report again highlights the importance of import prices to Swiss CPI inflation and, by extension, should reinforce the SNB's determination to prevent any renewed appreciation by the local currency.

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.