The industrial product price index (IPPI) for Canada rebounded 0.4 percent in January after declining 0.9 percent in December and 0.5 percent in November. The index increased 5.4 percent year-over-year, down from 7.1 percent in December. Excluding energy and petroleum products, the IPPI was also up 0.4 percent on the month, for a 3.6 percent 12-month advance.

Energy and petroleum prices recovered 0.4 percent on the month after a 10.2 percent drop in December, and were up 19.8 percent from a year earlier. Crude oil used to make refined petroleum products increased 1.3 percent from December, when US refinery utilization declined as a result of severe cold weather conditions. Overall, prices increased in 13 of 21 categories. On the downside, likely reflecting the ongoing weakening of the housing sector in the US, Canada's primary market for softwood lumber, prices for the latter fell 9.1 percent in January, recording their sixth consecutive monthly decline.

In a third consecutive retreat, the raw materials price index (RMPI) edged down 0.1 percent on the month, for a 12-month increase of 1.2 percent, sharply down from 7.5 percent in December. Four out of six categories posted lower prices on the month, including a 1.4 percent decrease in prices for crude energy products, which were up 2.2 percent year-over-year. The RMPI excluding crude energy products rose 0.9 percent on the month and 0.8 percent year-over-year.

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 report also contains a measure of domestic producers' raw material costs (RMPI) which can be seen as a very loose leading indicator of the IPPI.

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.