This pipeline on early warning inflation pressures is ‘lit up,’ warns Scotiabank economist

Under-the-radar costs to produce goods in Canada came in “hot,” possibly foreshadowing higher prices across the economy, says one economist.

“Everything this country produces is lit up,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, said about the industrial product price index (IPPI) and raw materials price index (RMPI), which accelerated two per cent and 4.8 per cent, respectively, in September from August, overshooting estimates of 0.9 per cent and 2.9 per cent.

The prices of energy and refined products such as diesel were the main contributors to the increase in the IPPI as they rose 12.1 per cent, Statistics Canada said. Diesel fuel prices jumped 18.4 per cent month over month.

“Diesel fuel prices made the biggest impact on this increase,” the agency said last Thursday.

This was the 24th straight monthly increase for the IPPI, as diesel fuel soared 104 per cent year over year.

Prices also rose across other categories, with unwrought gold, silver and platinum group metals and their alloys rising 32 per cent, the “next largest contributions” to the index, Statistics Canada said.

Unwrought copper and copper alloy prices were up 46 per cent and unwrought aluminum and aluminum alloys increased 27 per cent.

“Business-to-business and importer-to-business, all those parts of the supply chain are aggressively passing on their cost increases through not just oil and gas, although gas and diesel are a part of that, but across the whole suite of the commodity pressures,” Holt said.

He said it is possible producers will absorb some of the rising costs because of healthy margins, but that tactic can only go so far in shielding the economy, businesses and consumers if shareholders start to “revolt” and demand higher prices be passed on.

“We’re starting to see the early days of that in the consumer prices,” he said.

Charles St-Arnaud, chief economist at Servus Credit Union in Edmonton, said the IPPI and RMPI data points aren’t “major indicators,” but they do provide signals on the cost pressures businesses face.

In the post-pandemic run-up in inflation, the IPPI reached its peak a year before the CPI topped out at 8.1 per cent in June 2022.

“At some point, those costs are going to be likely passed onto consumers or into consumer goods prices,” St-Arnaud said. So, that’s why it’s good to track them.”

The September consumer price index (CPI) released last week by Statistics Canada accelerated to 3.1 per cent year over year from three per cent in August, though the core measures of the CPI that the Bank of Canada looks at slowed to less than two per cent, which is the central bank’s target for inflation.

But Holt said there is a trend of inflation, minus food and energy, coming in above the two per cent inflation target.

Core inflation “is the gold standard” for the Bank of Canada on inflation, but he said an argument can be made for focusing on less-cited measures such as IPPI and RMPI.

“There’s a pipeline argument, so a pipeline of pressures that you can monitor before it shows up in CPI, and so producer prices are in that category of those pipeline measures,” he said. “It provides those early warning signals about what could show up in consumer prices further down the road, and it’s sending some pretty clear warnings.”

The Bank of Canada’s latest Business Outlook Survey and Canadian Survey of Consumer Expectations said inflation expectations rose in the third quarter due to high energy prices and the breakdown in trade talks between Canada and the United States.