Industrial product and raw materials price indexes, December 2022

Industrial Product Price Index: 2022 Annual Review

The Industrial Product Price Index (IPPI) measures price changes for outputs of the Canadian manufacturing industry. Just as the Consumer Price Index measures inflation of prices for consumer purchases, the IPPI measures inflation for manufacturers' selling prices.

Inflation was the main economic topic in 2022. Retrospectively, what does the IPPI tell us about producer price inflation in 2022 compared with previous years? One way to analyze prices is to look at the average price level for each year in the IPPI series, which goes back all the way to 1956. From 2021 to 2022, the annual IPPI increased by 12.9%.

Looking at a longer timeline, the price of goods sold by manufacturers operating in Canada was 9.5 times higher in 2022 than in 1956. While much of this price inflation happened gradually over the previous 65 years, the previous two years have shown unprecedented growth.

The 12.9% increase in the IPPI in 2022 was the fifth largest gain on record since the series began in 1956.

High prices for crude oil were a dominant factor in all five largest gains on record for the annual IPPI. In 1973/1974, following an embargo by Organization of Petroleum Exporting Countries (OPEC), oil prices quadrupled in what is now known as the first oil crisis. In 1979, the world saw the second oil crisis, as lower production from Iran prompted another price shock.

Crude oil prices affect the IPPI directly, as crude is the main input to refined petroleum products (including gasoline and diesel), and these products carry a large weight within the index. There are also secondary effects from other products derived from crude oil or petroleum, such as chemicals, plastics and fertilizers. Furthermore, as energy is used for industrial production as well as transportation, it can affect the costs for many products.

In 2022, the price of energy and petroleum products measured by the IPPI rose by 53.3% (correction), following a 42.8% increase in 2021 and a 27.5% decrease in 2020. Why did energy prices rise so much? Global oil prices fell sharply in 2020 due to the COVID-19 pandemic reducing demand. In response to low prices, producers reduced supply, including production cuts by OPEC+. As global economies reopened with fiscal and monetary stimulus, demand recovered faster than overall supply. Global consumption was in excess of production for most months from July 2020 to January 2022. Furthermore, in 2022, Russia's invasion of Ukraine created uncertainty about supply and prices, as Russia is the world's third biggest oil producer.

Excluding energy and petroleum products, prices of products sold by manufacturers in Canada were up 8.4% in 2022, the second highest increase on record since the inception of that category in 1980, surpassed by 2021 (+11.5%).

Prices for food products made by manufacturers in Canada rose in 2022. Prices for intermediate food products increased 21.2%, and this group includes cooking oils, such as canola oil, which is a staple Canadian product. Strong demand underpinned these increases, while the Russian invasion of Ukraine also played a role in driving up costs for food producers. The conflict blocked exports of grains from Ukraine and drove up prices for natural gas, as Russia is a large energy exporter. Natural gas is used in the production of fertilizers and as such the price of ammonia and chemical fertilizers was up 50.3% (correction) in 2022. Animal feed (+16.4%) (correction) also rose. Together, these price pressures contributed to higher prices for fruit, vegetables, feed and other food products (+14.4%), as well as meat, fish and dairy products (+3.6%).

Prices for both ferrous and non-ferrous metals increased in 2022. The most notable metal story in 2022 was the roller coaster market for nickel. On March 8, the London Metal Exchange (LME) price of nickel briefly surpassed $100,000 USD per megaton. For reference, the price was typically in the range of $10,000 to $20,000 for the previous 10 years. The exceptional increase was caused by a short squeeze, a situation in which traders betting that the price of nickel would decline are forced to purchase the asset (known as 'covering' a short) if their bet fails and the price increases instead. These forced purchases induce demand and further push the price up, which makes more shorts cover and, in turn, the price can continue rising. The LME suspended nickel trading that day for the first time in 30 years, and eventually even cancelled transactions from March 8. Prices for basic and semi-finished iron or steel products rose 5.6% (correction) in 2022, as Chinese production fell by 2.2% in 2022 compared with the previous year, according to the China Iron and Steel Association. Production throughout the year was curbed intentionally intermittently to reduce emissions, amid a slowing property market and sporadic COVID-19 lockdowns.

Elevated input costs together with supply chain challenges, contributed to higher prices for metal building and construction materials (+17.9%) and for fabricated metal products (+21.3%).

As US and Canadian interest rates rose in 2022 in response to inflation, the US housing market cooled and, in turn, reduced demand for softwood lumber. When looking at the annual IPPI (which looks at the average price within a given year), softwood lumber prices were down by 6.5% (correction) in 2022, after gaining 60.3% in 2021 and 38.6% in 2020. However, within the year, there was substantial movement, and by December 2022, softwood lumber prices fell to levels last seen in June 2020.